The Corporate Insolvency and Governance Bill will enable companies undergoing a restructuring and rescue process to continue trading, writes Duff & Phelps’ David Fleming
The Bill, introduce on 20 May 2020, contains a number of temporary and permanent provisions to assist companies through the Covid-19 crisis. However, some of these proposals have been in consultation for some time, originally outlined in a March 2018 consultation, albeit with some significant changes.
These reforms also reflect a number of provisions contained in a European Commission Directive from November 2016.
Under this Directive, the Commission proposed that the insolvency legislation of each EU member state should include three of the key elements set out in the government’s proposals: a moratorium, a prohibition on ‘ipso facto’ clauses and the ability to confirm a restructuring plan if it complies with the ‘cross-class cram-down’ (an involuntary imposition by a court of a reorganization plan over the objection of some classes of creditors) requirements.
The Bill also contains a number of temporary changes to prevent winding up petitions and statutory demands, together with the temporary suspension of wrongful trading provisions until 30 June 2020 at the earliest, allowing directors to continue trading without the threat of personal liability.
In addition, the Bill will ease regulatory requirements enabling companies to delay annual general meetings until late September 2020 or hold ‘closed AGMs’ online.
Of the three permanent changes to the insolvency regime, the most impactful is the introduction of a ‘company moratorium’. This provision will give distressed companies which are viable 20 business days, extendable to 40 or longer by agreement, to pursue a rescue plan.
To qualify for the moratorium, a company must be unable to pay its debts and it is likely that a moratorium would result in a rescue of the business as a going concern.
The exit from the moratorium may be achieved in a number of ways including a rescue, sale, refinance, company voluntary arrangement (CVA), scheme of arrangement or restructuring plan.
While the company remains under the control of its directors throughout the moratorium, it is envisaged the appointed ‘monitor,’ who must be a licensed insolvency practitioner, will be comfortable that a rescue is achievable and then monitor the process throughout.
This means that protection is provided to the company and the creditors are unable to commence legal action via winding up petitions or by other enforcement avenues available to them.
The second new provision in the Bill is a change to existing supplier contracts so that termination clauses do not trigger, and supply issues or price increases cannot be implemented. This will mean that contracted suppliers will have to continue to supply companies despite the pre-insolvency arrears, unless they can demonstrate ‘hardship’ as a result.
The third key element of the Bill will enable companies in financial difficulty, or their creditors, to form a ‘restructuring plan’. Although similar to a scheme of arrangement, the major difference is that it can impose the restructure on any dissenting creditors, be it secured or unsecured, who voted to reject it. But these dissenting creditors cannot be put into a worse position than what the court considers would have been the most likely outcome if the plan was rejected.
In enabling businesses to continue trading even if they are undergoing a rescue or restructure process, the changes introduced are designed to avoid insolvency, preserve employment along with potential enterprise value and should therefore be welcomed. But the key test will be in the detail and practical implications of the new measures.
The challenge now is how fast these changes can be made. With parliament now sitting, this significant support for the UK economy is being fast tracked through with the aim to enact the Bill by June at the earliest.
It is our contention that this might not be the end of the reforms to the existing legal framework. We could potentially see a flattening out of global insolvency framework, moving to a more level, fairer playing field. In doing so the international business community, and the small to mid-sized enterprises they support, will be better placed to restart and return to trading.
About the author: David Fleming is Managing Director, Restructuring Advisory, at Duff & Phelps