Corporate Insolvency and Governance Act 2020

United Kingdom

This briefing note was originally published on 01 July 2020 and has been updated to reflect the law as at 13 October 2020.

Introduction

On 20 May 2020, the UK Government published the Corporate Insolvency and Governance Bill (the “Bill”). The Bill was published in response to COVID-19, with a view to assisting companies and directors through the difficult conditions caused by the pandemic.

The Bill went through an accelerated parliamentary process and received Royal Assent on 25 June 2020. The Corporate Insolvency and Governance Act 2020 (the “Act”) has therefore been passed into law. It brings about the most significant changes in UK corporate insolvency law for nearly 20 years.

The key insolvency related reforms included in the Act are:

  1. the new moratorium outside of a formal insolvency process;
  2. the new restructuring plan;
  3. restrictions on use of statutory demands and winding up petitions in connection with COVID-19 related debts; and
  4. protection of supplies of goods and services.

New Moratorium

The Act introduced a new moratorium intended to provide companies with breathing space in which to explore options for survival.

Eligibility

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 March 2021, this restriction is lifted to account for the impact of COVID-19).

Process

The directors of an eligible company can obtain a moratorium by filing certain documents at court. A company subject to an outstanding winding-up petition would, in normal circumstances, need to seek a court order to avail itself of a moratorium; however, for the period ending on 30 March 2021, it too must apply for a moratorium by filing papers at court.

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 to obtain one.

The documents to be 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”), confirming that that person is qualified to and consents to act as monitor in respect of the moratorium, that the company is eligible for a moratorium and that, in the proposed monitor’s view, it is likely that a moratorium would result in the rescue of the company as a going concern.

Duration of moratorium

The moratorium comes into effect on the date on which the papers are filed at court (or, if applicable, the date of the court order granting the moratorium) and initially lasts for 20 business days. The directors of the company can extend the moratorium for a further 20 business days; to be able to do so, among other things the directors will need to confirm that all debts incurred during the moratorium (and certain kinds of debt arising before it, as discussed below) have been or will be met. Further extensions, up to a maximum aggregate period of one year, require pre-moratorium creditor consent. The court may also extend the moratorium for such period as it sees fit.

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 the moratorium or as a result of an obligation arising before the moratorium. Exceptions are, among other things, 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 (“priority pre-moratorium debts”);
  • priority pre-moratorium debts are afforded super-priority should the company go into liquidation or administration within 12 weeks of the end of the moratorium. However, this does not now apply to accelerated debt;
  • 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;
  • other effects are similar to those in 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; and
  • certain restrictions are imposed on the company during the moratorium, and certain acts require leave of the court or the consent of the monitor.

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.

The monitor must bring the moratorium to an end, by filing a notice at court, if any of a number of situations arises, including where a rescue of the company as a going concern is no longer likely or where the company is unable to pay debts incurred during the moratorium (including priority pre-moratorium debts). It will also end if the company is rescued as a going concern.

Protections

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). The Board of the Pension Protection Fund may also seek relief on these grounds.

New restructuring plan

The Act introduced a new restructuring plan by inserting a new Part 26A into the Companies Act 2006 (the “2006 Act”) (Arrangements and Reconstructions for Companies in Financial Difficulties). Situating the restructuring plan provisions immediately adjacent to those governing schemes of arrangement (at Part 26 of the 2006 Act) highlights the fact 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, using a restructuring plan, to cram down a dissenting class (or classes) of creditors or members.

Process

The new Part 26A applies to any company liable to be wound up under the Insolvency Act 1986 (including 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 of Part 26A 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, with no requirement for approval by a majority in number, as is the case with a scheme of arrangement. 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, addressing questions 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 or classes have 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 which would receive a payment, or which has a genuine economic interest in the company in the event of the relevant alternative, voted in favour of the plan. The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the plan were not sanctioned and, in many cases, is likely to be a formal insolvency process.

Where a plan is proposed within 12 weeks of the end of a new moratorium period, it cannot affect the rights of creditors in respect of moratorium debts or priority pre-moratorium debts (discussed above).

Restrictions on Statutory Demands and Winding-Up Petitions

A creditor may not rely on an unsatisfied statutory demand as grounds for winding up a debtor company where that demand was served during the period 1 March to 31 December 2020. Similarly, no winding-up petition may be presented by a creditor on the basis that a company is unable to pay its debts, unless that creditor has reasonable grounds for believing that either (i) COVID-19 has not had a financial effect on the company; or (ii) that the company’s inability to pay would have arisen even if COVID-19 had not had a financial effect on it.

It should be noted that this does not just apply to landlords seeking unpaid rent but to all creditors seeking to recover debts due to them.

The restrictions apply to any winding-up petition presented after 27 April 2020, and there are detailed provisions relating to the reversal of any winding-up order made between 27 April and 26 June 2020 if the reasons for the winding-up related to COVID-19.

The Act also provides that, for winding-up orders made based on petitions presented between 27 April and 31 December 2020, 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.

Protection of Supplies of Goods and Services

The Act prohibits the operation of certain provisions in a contract for the supply of goods or services to a company. These are provisions under which, as a result of the company becoming subject to an insolvency procedure: (i) the contract terminates or may be terminated; or (ii) any other thing may take place. The scope of the provision is intentionally wide.

An “insolvency procedure” for these purposes 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 commencement of the 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 insolvency officeholder consents. It may also terminate with the permission of the court, where the court is satisfied that the continuation of the contract would cause the 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 that 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 or in relation to contracts involving financial services. Until 30 March 2021, it also does not apply to small suppliers.