On 20 May 2020 the Government published The Corporate Insolvency Governance Bill, which has been laid before parliament and is expected to be implemented into law shortly. Whilst most of the proposed measures within the Bill have been under consideration for some time, others have been introduced as a result of and to assist businesses affected by Covid 19. The Covid 19 related measures are intended only to apply for a temporary period, but parliament will have the power to extend such periods if this becomes necessary.
A summary of the main measures included in the Bill is set out below.
A new restructuring plan is to be introduced. This will be modelled on the existing scheme of arrangement procedure but will introduce a cross-class cramdown (a feature of US Chapter 11 bankruptcies) to allow dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable and the court being satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure. Unlike a company voluntary arrangement (CVA), it will have the ability to bind both secured creditors and unsecured creditors.
The plan will be available to both solvent and insolvent companies and creditors will vote on the plan in separate classes (a similar feature in schemes of arrangement). The plan will require the approval of a minimum of 75% in value in each class of those voting.
Insolvent companies or companies that are likely to become insolvent can obtain a 20 business day moratorium period, giving struggling businesses an opportunity to consider a rescue plan without the threat of creditor action. The moratorium will be extendable by the directors for a further 20 business days or with creditor consent for up to a year. The request for an extension must be made within the initial 15 business day period of the moratorium. The moratorium will bind both secured creditors and unsecured creditors.
The moratorium will be available to all companies with some limited exceptions. To obtain the benefit of the moratorium the directors will be required to make a statement that the company is, or is likely to become, unable to pay its debts and the 'monitor' (who must be a licenced insolvency practitioner) must make a statement that it is likely that the moratorium would result in the rescue of the company as a going concern. The directors will remain in charge of running the business on a day-to-day basis. The monitor’s role will be to ensure that the company complies with the requirements of the moratorium, to approve the sale of assets outside the normal course of business and to approve the granting of new security over the company’s assets.
Creditors will have the ability to challenge the actions of the directors or the monitor on grounds that their interests have been unfairly prejudiced.
The Bills aims to restrict statutory demands and winding up petitions being issued against companies where the debt is unpaid for reasons relating to Covid-19 with the introduction of temporary provisions to void statutory demands made between 1 March 2020 and 30 June 2020.
A winding up petition cannot be presented by a creditor during the period of 27 April 2020 (it has retrospective effect) to 30 June 2020 or one month after the coming into force of this Bill, whichever is the later, unless the creditor has reasonable grounds for believing that (a) coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor. Coronavirus will have a “financial effect” on a debtor if the debtor’s financial position worsens in consequence of, or for reasons relating to, coronavirus.
In addition no petition for the winding up of a company can be presented on or after 27 April 2020 on the grounds that the company has failed to satisfy a statutory demand if the statutory demand was served between the dates of 1 March 2020 and 30 June 2020.
It is common practice for suppliers to cease supplying or threaten to cease supplying a company that has entered into an insolvency process. Supply contracts will often give the supplier a contractual right to do this, depriving the supply of services crucial to the continued trading and a rescue the business.
Utility companies are under existing legislation prohibited from stopping supplies to insolvent companies where the supplies continue to be paid for. However, the Bill extends this and will prohibit all suppliers from stopping supplies by reason of the company's insolvency as long as the supplies continue to be paid for. Suppliers will be prohibited from amending contractual terms to increase payments for such supplies.
There will be an exception to the above and the supplier can be relieved of the obligation to continue supplying the services if it causes hardship to the supplier's business. There will also be a temporary exception for small company suppliers during the pandemic.
The Bill will temporarily suspend the wrongful trading provisions (contained in the Insolvency Act 1986) with retrospective effect from 1 March 2020 to 30 June 2020. When determining the liability of a director under the legislation 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 period from 1 March 2020 to 30 June 2020.
Whilst this may carve out the losses during this period, losses incurred before and after that period will still remain a factor. In addition, directors' duties to their creditors during such periods continue and it will not prevent liquidators and administrators bringing claims against directors for breaches of such duties.
The Bill allows the Secretary of State to temporarily make further extensions to deadlines provided for in the Companies Act 2002, extensions of time having already been offered to companies.
The extended period for the filing must not exceed: