This article states the position as at 21 May 2020. An article reflecting subsequent changes to the law can be read here.
On 28 March 2020, the UK Government announced upcoming insolvency law reforms in response to Covid-19, intended to help companies and directors.
On 23 April 2020, the UK Government announced further measures to protect the UK high street from aggressive rent collection by prohibiting the use of statutory demands and winding up petitions to collect rent which was unpaid due to difficulties caused by Covid-19. However, at the time, it was unclear from the announcement as to whether these prohibitions would extend beyond unpaid rent to other debts.
On 20 May 2020, the Corporate Insolvency and Governance Bill 2020 (the “Bill”) was introduced to the House of Commons to provide much needed detail of these proposals. The Bill is expected to go through an accelerated parliamentary process and be passed into law shortly.
The overarching objective of the Bill is to provide businesses with the flexibility and breathing space they need to continue trading during the difficult time caused by Covid-19. The Bill has three main sets of measures to achieve its purpose:
- the introduction of greater flexibility to the insolvency regime, allowing companies breathing space to explore options for survival, while also maintaining supplies;
- the temporary suspension of certain wrongful trading laws to support directors who continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action; and
- giving companies and other bodies temporary easements on company filing requirements and requirements relating to meetings.
This note focuses on the first two. The key insolvency related reforms included in the Bill are:
- New moratorium outside of a formal insolvency process.
- New restructuring plan.
- Prohibition on issuing statutory demands and winding up petitions in connection with Covid-19 related debts.
- Retrospective suspension of wrongful trading.
- Protection of supplies of goods and services.
The Bill proposes a new moratorium intended to provide companies with breathing space to explore options for survival.
Companies are generally eligible, unless excluded. A company will be excluded if: (i) it is already subject to a formal insolvency proceeding; (ii) during the period of 12 months prior to the filing date, it has been subject to a moratorium, unless the court orders otherwise; or (iii) during the period of 12 months prior to the filing date, it has been subject to a CVA or administration (although for a temporary period ending on 30 June 2020 or one month after the Bill comes into force, if later, this restriction is lifted to account for the impact of Covid-19). The requirement that a company had to be solvent to avail of the moratorium, as provided for in earlier Government proposals in August 2018, has therefore been removed.
In addition, financial services companies, including insurance companies and banks, are ineligible.
The directors of an eligible company can obtain a moratorium by filing relevant documents at court. A company with an outstanding winding up petition would, in normal circumstances, need to seek a court order to avail of a moratorium, however for the period ending on 30 June 2020 or one month after the Bill comes into force, if later, it will also be able to simply file papers at court, to account for Covid-19.
An overseas company, being one which could be wound up under the Insolvency Act 1986, can also seek the benefit of a moratorium, but would need to seek a court order.
The documents filed at court require a statement from the directors that they wish to obtain a moratorium and that in their view the company is or is likely to become unable to pay its debts. There must also be a statement from a suitably qualified person (the “monitor”) that he/she is qualified, consents to act as monitor, that the company is eligible and that in their view, it is likely that the moratorium would result in the rescue of the company as a going concern (or for the period ending on 30 June 2020 or one month after the Bill comes into force, if later, would do so if it were not for any worsening of the financial position of the company for reasons relating to Covid-19).
Duration of moratorium
The moratorium comes into effect on the date the papers are filed with court (or, if applicable, the date of the court order). The initial moratorium will last for 20 business days. The directors can extend the moratorium for a further 20 business days. To be able to do so, amongst other things the directors will need to confirm that all moratorium debts have or will be met. Further extensions require pre-moratorium creditor consent, up to a maximum period for the moratorium of one year. The court may also extend the moratorium. There does not appear to be a maximum duration if the extension is granted by court order.
Effect of moratorium
The effect of the moratorium includes the following.
There is a restriction on the enforcement or payment of pre-moratorium debts, being debts that have fallen due before or fall due during the moratorium, other than (amongst others) amounts payable in respect of goods or services supplied during the moratorium, rent in respect of the period of the moratorium, wages or salary and debts or other liabilities arising under a contract or other instrument involving financial services.
In addition, no insolvency proceedings may be commenced against the company during the moratorium period, save that the directors may initiate insolvency proceedings if they notify the monitor.
Further effects are similar to an administration moratorium. Except with the leave of the court, no creditor may enforce security or repossess goods in the company’s possession. No proceedings or legal process may be commenced or continued, and a landlord may not exercise a right of forfeiture by peaceable re-entry. Further, the moratorium prevents a floating charge from crystallising and prevents restrictions being imposed on the disposal of assets.
Certain restrictions are imposed on the company during the moratorium, and certain acts require leave of the court or the consent of the monitor.
There are detailed provisions about the role of the monitor. His/her role includes ensuring that it is appropriate for the moratorium to remain in place, including whether it remains likely that the moratorium will result in the rescue of the company as a going concern (or for the relevant period, would do but for Covid-19), and sanctioning certain acts by the company.
The monitor must bring the moratorium to an end, by filing a notice at court, if any one of a number of situations arises, including that a rescue of the company as a going concern is no longer likely or the company is unable to pay its moratorium debts. It will also end if the company is rescued as a going concern.
Finally, there are protections for creditors (or members) of the company to apply to court for relief on the grounds that the company’s affairs, business and property are being or have been managed in a way that has unfairly harmed their interests (or may do so).
New Restructuring Plan
The Bill proposes a new restructuring plan by inserting a new Part 26A into the Companies Act 2006 (Arrangements and Reconstructions for Companies in Financial Difficulties), highlighting that the new restructuring plan is intended in many respects to be similar to a scheme of arrangement. The one significant difference is the ability to cram down a dissenting class using the restructuring plan.
The new Part 26A will apply to any company liable to be wound up under the Insolvency Act 1986 (so includes overseas companies) that has encountered or is likely to encounter financial difficulties that are affecting, or will or may affect its ability to carry on business as a going concern. The provisions provide for a restructuring plan to be proposed between a company and its creditors (and/or members) for the purpose of eliminating reducing, preventing or mitigating those financial difficulties.
Any creditor or member whose rights are affected by the plan must be permitted to participate in the process, but those who have no genuine economic interest in the company may be excluded. Affected members and creditors must be given sufficient information to be able to vote on the plan.
The voting majority for each class is 75% in value. There does not appear to be a majority in number required. If approved, an application to court for sanction of the plan is made. The court will adopt a similar approach as it does when considering whether or not to sanction a scheme, in other words it will be a question of both jurisdiction and discretion. In particular the court will assess whether a plan is just and equitable.
Dissenting class cram-down
The main new provision introduced in Part 26A is the ability for a plan to be sanctioned by the court where a class has voted against it. For a court to be able to sanction such a plan, certain conditions must be satisfied. These are that the members of the dissenting class would be no worse off under the plan than they would be in the event of the relevant alternative; and that at least one class who would receive a payment or would have a genuine economic interest in the company in the event of the relevant alternative voted in favour of the plan. Relevant alternative is whatever the court considers would be most likely to occur in relation to the company if the plan were not sanctioned.
Where a plan is proposed within 12 weeks of the end of a new moratorium period, it may not affect the rights of creditors in respect of moratorium debts, or pre-moratorium debts that were not subject to the restrictions imposed by the moratorium.
Restrictions on Statutory Demands and Winding Up Petitions
The Bill proposes provisions preventing certain statutory demands made by creditors being effective and temporarily prohibiting a winding-up petition from being brought against a company on the grounds that it is unable to pay its debts (or a winding-up order being made on those grounds) where the inability to pay is the result of Covid-19. It should be noted that this does not just apply to landlords seeking unpaid rent but all creditors seeking to recover debts due to them.
The provisions apply to any statutory demand served between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, if later), and prevents them forming the basis of a winding-up petition presented at any point after 27 April 2020.
Further, the provisions prohibit a winding-up petition being presented against a company on the ground that it is unable to pay its debts, unless the petitioner has reasonable grounds to believe that the inability to pay is not the result of Covid-19. Likewise, a court should not make a winding-up order unless satisfied that the facts by reference to which the relevant ground applies would have arisen even if Covid-19 had not had a direct financial effect on the company.
These provisions are to be regarded as having come into force on 27 April 2020. There are therefore detailed provisions as to the unwinding of any winding-up order made between 27 April 2020 and the date the Bill comes into force if made for Covid-19 related reasons.
The Bill also provides that for winding-up orders made based on petitions presented between 27 April 2020 and 30 June 2020 (or one month after the Bill comes into force, if later), the commencement date of the winding-up will be the date of the order, not the petition. This will have a number on knock-on effects, including that dispositions of property by the company made after the date of the petition will not be automatically void as they would be otherwise.
The Bill does not seek to amend sections 214 or 246ZB of the Insolvency Act 1986 dealing with wrongful trading, but instead proposes to change how those relevant sections will be applied in relation to a company’s financial position during the relevant period, being the period beginning on 1 March 2020 and ending on 30 June 2020 or one month after the Bill comes into force, if later.
In assessing what contribution, if any, a director is to make to a company’s assets when considering possible liability for wrongful trading, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors during the relevant period. Interestingly it does not explicitly require the worsening position to be caused by the Covid-19 crisis. The provisions are not available to directors of financial services firms including insurance companies and banks.
In all other respects, directors’ duties and responsibilities remain unaffected. This means that directors continue to owe a common law duty to the company to act in the best interests of its creditors if the company is insolvent or likely to become insolvent.
Protection of Supplies of Goods and Services
The Bill provides that a provision in a contract for the supply of goods or services to a company to terminate or be terminated or that provides for any other thing to take place when the company becomes subject to an insolvency procedure shall cease to have effect.
Insolvency procedure includes the new moratorium, administration, the appointment of an administrative receiver, the approval of a CVA, liquidation, the appointment of a provisional liquidator and the making of a court order convening meeting(s) of creditors (or members) pursuant to the new restructuring plan procedure.
Further, where a right to terminate arose prior to the relevant insolvency procedure, but was not exercised, that right is suspended on the occurrence of the insolvency procedure.
However, where a right ceases to have effect or is suspended, the supplier may nonetheless terminate the contract if the office holder consents or with the permission of the court where the court is satisfied that the continuation of the contract would cause supplier hardship.
It is implicit that a supplier will be paid for goods or services provided during the period of the insolvency procedure, and will be able to terminate the contract (provided the contract entitles it to do so) for non-payment for any such goods or services provided.
These provisions do not apply where the company or supplier is involved in financial services, including insurance companies and banks. It also does not apply where the supplier is what is defined as a small entity.