This blog post was written by a Freshfields team comprising Ken Baird, Richard Tett, Adam Gallagher, Catherine Balmond, Lindsay Hingston, Neil Golding, Craig Montgomery, Andy Hagan, Emma Gateaud and Katharina Crinson.
On 26 June 2020 the Corporate Insolvency and Governance Act 2020 (the Act) came into force. The Act marks the most significant insolvency reforms in a generation. It doesn’t just deal with measures required to tide companies through the COVID-19 pandemic but includes far-reaching wholesale reforms to the UK’s restructuring toolbox, including the introduction of the restructuring plan, which has the potential to be a gamechanger for restructurings.
There are two temporary measures dealing with COVID-19 impacts on companies specifically:
- A suspension of personal liability for wrongful trading until 30 September 2020.
- A temporary prohibition on creditors from filing statutory demands and winding up petitions for COVID-19 related debts until 30 September.
Both of these measures help directors trying to keep businesses going (although there are some significant exclusions from the scope of the wrongful trading liability suspension).
This is coupled with three permanent measures:
- The introduction of a restructuring plan which for the first time in UK history will allow a cross-class cram down of creditors.
- A prohibition on suppliers of goods and services to terminate or otherwise vary a contract because the counterparty has entered into a relevant insolvency process.
- The introduction of a moratorium, which will give companies a protective shield outside administration.
A final measure made it into the Bill at the House of Lords stage to reinstate the government’s power to regulate pre-packs to connected parties. A provision introduced to reserve the power to make such regulation if the government was not satisfied with the industry’s voluntary compliance with the pre-pack pool was not exercised by May 2020 when it initially expired. The provision has now been reinstated, so the government has up to June 2021 to make such regulations. Until then, compliance with the pre-pack pool regime remains voluntary.
Looking ahead, the new restructuring plan could help companies as they look to reset their balance sheet in the coming months. This will introduce cross-class cramdown for the first time in England, meaning that one impaired class of creditors (senior lenders, for example) could agree to compromises that bind all creditors, subject to various safeguards including court approval. In practice, this will make it more feasible to implement a wholesale financial and operational restructuring affecting the general body of creditors. It is a big new development and we expect to see the restructuring plan in action not before long.
In our previous blog we highlighted that the new tools do not replace the existing regimes which will also continue to be available and are being used in more creative ways (for example the light touch administration regime).
The UK’s reforms do not go as far as some other jurisdictions, which have implemented more comprehensive relief during this crisis period. However, combined with a creative approach to existing tools, they will add greatly to the ability of companies to weather the storm.
The Restructuring Plan is a big new development and we expect to see it in action not before long.