This blog post was written by a Freshfields team comprising Katharina Crinson, Lindsay Hingston, Catherine Balmond, Richard Tett, Ken Baird, Adam Gallagher, Craig Montgomery, Neil Golding, Andy Hagan and Emma Gateaud.
In March 2020, the UK government announced that changes will be made to enable UK companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency.
The legislation implementing this has now been laid before Parliament in the Corporate Insolvency and Governance Bill. This includes measures intended to tide companies through the COVID-19 pandemic, as well as far-reaching wholesale reforms to the UK’s restructuring toolbox.
Next stages are that the House of Commons will debate the Bill (all three stages at once) on 3 June 2020 – the passage of the Bill in the House of Lords is expected to include more debate, but still progress speedily. Here is a summary of the Bill. If you are interested in more detail then contact us.
Temporary COVID-19 measure: wrongful trading
- There is a suspension of liability for wrongful trading in relation to the period from 1 March until 30 June* (with the possibility of this being extended).
- However, there are broad exclusions, and it is unlikely this suspension applies to any company that is part of a group that has issued a bond, note or other debt capital markets instrument.
- There are no other changes to the law as it relates to director conduct, including directors’ duties, claw-back provisions and the disqualification regime.
Temporary COVID-19 measure: winding-up petitions
- From 27 April, statutory demands served between 1 March or 30 June* cannot be used as a basis for winding up.
- From 27 April to 30 June*, winding up for cashflow or balance sheet insolvency is only available where it can be demonstrated that the company would have been insolvent notwithstanding COVID-19's financial effect on it.
- Any winding up orders made between 27 April and the coming into force of the legislation will be void.
Permanent measure: protection of supplies
- If a company enters a qualifying form of insolvency process (including the moratorium, plan, CVAs, administration and liquidation), suppliers cannot:
- terminate or do any other thing (for example change terms) as a result of the commencement of the insolvency process, or pre-commencement events; or
- impose ransoms by demanding payment of outstanding amounts as a condition of continuing supply.
- The scope of the restrictions is broad, but the triggers are late as the prohibition generally only bites once the company is subject to an insolvency process.
- There are also broad exclusions, most notably for financial creditors. The provisions therefore appear to primarily affect trade creditors.
Permanent measure: moratorium
- A new free-standing moratorium is introduced as a form of debtor-in-possession proceeding, but overseen by an insolvency practitioner acting as the 'monitor'.
- It is available to a company that is insolvent, or is approaching insolvency, if it is likely it can be rescued as a going concern. However, there are once again broad exclusions including in relation to groups that have issued bonds or notes.
- The moratorium is similar in scope to that which applies in administration, preventing security enforcement and legal proceedings among other things.
- It also provides a payment holiday for certain debts incurred prior to the moratorium. However, there are many exclusions including in relation to financial debt, meaning that it is trade creditors who may be most affected.
- The current drafting seems to risk elevation of all financial debt in a subsequent administration or liquidation if it is accelerated during the moratorium (and would prevent this from being compromised in a CVA or a restructuring plan).
- The moratorium cannot continue beyond 40 business days without the consent of either creditors or the court.
- The moratorium may emerge as the counterpoint to 'light-touch administration': a debtor-in-possession process with monitor supervision, rather than an IP-lead process with consent for continued management powers.
Permanent measure: restructuring plan
- This is essentially a 'super-scheme' building on the existing scheme framework but with significant adjustments.
- As with the scheme, the plan is a form of compromise between a company and its creditors and/or members, requiring a vote of creditors and/or shareholders and the sanction of the court.
- The plan introduces a flexible form of cross class cram down, meaning that (subject to various safeguards) the court has the discretion to sanction a plan even if certain classes vote against it.
- A non-consensual senior lender-led deal could be delivered via the plan without the need for a separate enforcement process to deliver the equity.
- In theory, the plan is also flexible enough to allow for junior 'cram-up', although there are various issues to navigate in this context.
- The voting threshold is 75 per cent by value of each class present and voting (subject to cram-down), with no separate tests for numerosity or unconnected parties.
- For both the moratorium and the plan, overseas companies are eligible provided (in broad terms) they have a sufficient connection with England.
* Or one month after the Bill is enacted, if later (which it is expected to be).
This includes measures intended to tide companies through the COVID-19 pandemic, as well as far-reaching wholesale reforms to the UK’s restructuring toolbox.