Breathing space for companies
In March 2020 we explained that the government had announced changes to the UK’s insolvency regime. The intention was to give companies breathing space and enable them to keep trading while exploring options for rescue. Some changes were to be temporary, to mitigate the impact of Covid-19, and others were to be permanent.
A draft Bill was published on 20 May 2020 and after some minor amendments the Corporate Insolvency and Governance Act 2020 came into force from 26 June 2020. This overview summarises how the law has changed, the implications for businesses and how we can help.
The main changes are:
- a new moratorium procedure;
- a new restructuring plan procedure;
- restrictions on termination clauses in supply contracts; and
- temporary measures to:
- restrict winding-up petitions;
- limit liability for wrongful trading;
- extend the availability of moratoriums; and
- relieve small businesses from the termination clauses restrictions.
There are also temporary changes to company meetings legislation and Companies House filing requirements.
What is the new moratorium procedure?
A moratorium is a debtor-in-possession procedure for companies that are or are likely to become insolvent. The company’s directors remain in control and the company is legally protected against action by secured or unsecured creditors. A moratorium lasts 20 business days and can be extended. It is overseen by a monitor, a licensed insolvency practitioner, whose role is not to be involved in management of the company, but to ensure that the company continues to qualify for a moratorium. Important qualifications are that:
- it is likely that the moratorium will lead to the company being rescued as a going concern; and
- debts incurred during the moratorium are paid as they fall due.
What is the new restructuring plan procedure?
A restructuring plan is similar to a Scheme of Arrangement under the Companies Act. It allows a company to bind all creditors, including junior classes of creditors that vote against the plan. This process of “cross-class cram down” can apply to dissenting classes of creditors who will be no worse off than they would than they would have been under an alternative procedure. Both solvent and insolvent companies that have encountered or are likely to encounter financial difficulties can propose a restructuring plan to their creditors. It is a court-oriented process, which may be too costly and cumbersome for small or medium-sized businesses.
What are the restrictions on termination clauses in supply contracts?
Suppliers of goods or services cannot now rely on contractual terms to stop supplying or to vary the contract terms once a customer company has gone into an insolvency procedure (including a moratorium or a restructuring plan). Such a company cannot be required to pay for outstanding amounts due for past supplies as a condition of continued supply.
We envisage that suppliers will look carefully at their contractual terms and, where possible, change them to limit the impact of the new law. The relationship between companies and their suppliers will change, with some long-term supply agreements disappearing.
What are the temporary restrictions on winding-up petitions?
No winding-up petition may be presented between 27 April 2020 and 30 September 2020 based on a statutory demand served between 1 March 2020 and 30 September 2020. No petition may be presented on grounds of an unsatisfied judgment debt or proof to the court of insolvency unless the creditor had reasonable grounds for believing that:
- coronavirus has not had a financial effect of the company; or
- the ground on which the petition is presented would apply even if coronavirus had not had a financial effect on the company.
Almost no companies will be wound up until after 30 September 2020, but it seems likely that the government will seek to smooth the cliff-edge that will be faced on that date, given the likely debt burden from the lockdown period that companies will be unable to pay.
What temporary protection is there for directors against liabilities for wrongful trading?
If in due course a wrongful trading claim is brought against a director, the court must assume, for the purposes of determining compensation, that the director was not responsible for any worsening of the financial position of the company or its creditors between 1 March 2020 and 30 September 2020.
In reality, most claims against directors are for breach of duty (e.g. to act in the interests of creditors when a company is insolvent), which are not limited by the temporary provisions. Any director who is concerned about whether they may be at risk by having an insolvent company continue to trade should take professional advice. Our contact details are below.
What are the temporary differences for moratoriums?
To enter a moratorium on or before 30 September 2020, the test for the company to pass and for the monitor to adjudicate is that, but for coronavirus, the moratorium would have been likely to lead to the rescue of the company as a going concern. This will require:
- identifying the company’s financial position before coronavirus had any effect (probably straightforward);
- projecting the company’s likely position from before coronavirus to the present on assumptions that disregard the effect of coronavirus (potentially difficult to satisfy the monitor that a particular result, or better, was likely); and
- projecting forward from the present, adjusted for the effect of coronavirus, to show that a moratorium would have been likely to lead to rescue of the company as a going concern (potentially difficult to satisfy the monitor that rescue was likely).
To be able to benefit from a moratorium, a company is likely to have been healthy before coronavirus and should now be either cash rich or cash generative. Those that are not suitable will need to consider an alternative insolvency procedure. In any event, stressed and distressed companies should seek professional assistance.
What are the temporary arrangements for small business suppliers?
If a supplier, whether it’s a company or otherwise, is a small business and the customer company goes into insolvency on or before 30 September 2020, the restrictions on terminating supply contracts will not apply. A small business is one whose turnover is less than £10.2 million, its balance sheet is less than £5.1 million or it has fewer than 50 employees.
We appreciate there is a lot to digest even in this brief overview. Our Corporate Restructuring team is available to advise and assist should any of the above resonate with you. Contact a member of our team who will be happy to go through the Corporate Insolvency and Governance Act and its implications in more detail.