On Thursday 25 June 2020 the Corporate Insolvency And Governance Act received Royal Assent. The Act represents the biggest overhaul of the UK’s insolvency legislation for over 30 years. Whilst significant parts of the Act were put forward for consultation a couple of years ago, the rationale for introducing these changes now and for fast-tracking them onto the statute book appears to be the Government’s desire to give businesses additional support and options as they navigate their way through the difficulties presented by the COVID-19 global pandemic. Having said that, the majority of the changes introduced by the Act will have permanent effect, albeit there are some additional temporary provisions which will only apply for such period as the Government considers necessary to address the immediate issues presented by COVID-19.
Why Are These Changes Relevant to You?
The COVID-19 pandemic has had a significant impact on many businesses and sectors. Many businesses that were well run, financially viable and with a good business model have now been faced with the unprecedented challenge of having to mothball and effectively cease trading for a period of at least three months. Very few businesses had planned or budgeted for such a dramatic change in their business models. Accordingly, there should be no shame in a business saying that it may need to make use of some of the additional restructuring tools provided by the Act in order to allow the business to recover from the impacts of COVID-19.
Many other businesses will be in a more fortunate position; either not being as severely affected, or having had sufficient financial operational strength prior to lockdown so that the business does not need the additional support of these measures. However, virtually every business will find that some businesses within its supply chain, customer base or that it otherwise engages with are impacted by the changes. In those circumstances, it is just as relevant for those companies to understand how the Act and these new measures could affect customers, suppliers and third parties that they engage with.
What Are The Changes?
This is a stand-alone “debtor–in-possession” moratorium which most companies can seek the benefit of. The Moratorium can be for up to 40 business days without creditor approval and 12 months with it. It prevents secured creditors from enforcing or appointing an administrator and prevents most other creditors from taking any enforcement action as well. The Moratorium is supervised by an independent insolvency practitioner who acts as monitor.
One of the tools which is currently available to businesses looking to restructure is the Scheme of Arrangement. This is a court-regulated arrangement that allows a company to restructure its debts and deal with different classes of stakeholders in different ways. The Restructuring Plan could be seen as the little brother/sister of the Scheme of Arrangement. It is still court-driven, but is intended to be more widely used by SMEs and smaller corporates. One material change that it introduces is the concept of “cross-class cram-down” whereby a group of dissenting stakeholders can still be bound by the Restructuring Plan, provided the court ratifies it.
“Ipso Facto” Termination Clauses
Many suppliers’ contracts incorporate automatic termination provisions for when a customer enters an insolvency process. These are intended to allow the supplier to stop supplying when the counterparty enters insolvency. They are often used to leverage a payment for unsecured debts and/ or to change the terms of supply in an insolvency scenario. The Act provides a general prohibition on these sorts of clauses, meaning that in most cases, the supplier cannot terminate supplies simply because the customer has started an insolvency process.
One of the major concerns which directors have when a company starts to suffer financial distress is the risk of personal liability for wrongful trading. The Act introduces temporary changes relaxing the wrongful trading provisions, which will be for an initial period from 1 March 2020 until 30 September 2020. At the same time, the Act restricts the use of statutory demands, winding up petitions and the making of winding up orders during the same period. These measures are intended to provide additional respite for businesses as they seek to navigate the choppy waters of COVID-19.