CIGA turns 3

The government’s Insolvency Service published its Post Implementation Review of the Corporate Insolvency and Governance Act 2020 (CIGA) on 27 June 2023. The overall conclusion from the data collected, including a survey of insolvency practitioners, is that the permanent CIGA measures have been broadly welcomed by stakeholders and are seen as a positive addition to the UK’s rescue framework.

As a recap, the three permanent measures are:

• The restructuring plan, a restructuring tool modelled on the scheme of arrangement but with the ability to ‘cram down’ dissenting classes of creditors or shareholders;
• Suspension of termination clauses, preventing goods and services suppliers from enforcing termination clauses upon insolvency events; and
• Company moratorium, providing a short period of protection from creditor enforcement action for struggling companies in certain circumstances.

Each of these tools was evaluated by reference to policy objectives underpinning the measure. The review provides a table with possible refinements to be made to each of the measures but does not commit the government to making any of the outlined changes, several of which would require consultation and changes to primary legislation.

Restructuring Plan

The restructuring plan has seen the most success in meeting its policy objectives. While the government notes that there have been relatively few restructuring plans to date, it also notes that a certain period of adaptation is always required for new legislation to bed down. This is clearly also borne out in the number of restructuring plans currently in the court system.

The cross-class cram down feature has been used by large businesses, SMEs and mid market companies, and it is seen as an important contributor to the UK’s competitiveness as an international restructuring hub. While some concerns have been raised over whether creditors were being sufficiently informed and protected throughout the process, the review generally concludes that dissenting creditors were able to mount meaningful challenges to proposed restructuring plans.

Overall, the tool provides a valuable alternative to the scheme of arrangement in cases where not all classes of creditors are likely to vote in favour and has been able to build on existing scheme of arrangement case law to provide legal certainty.

The review notes the following five points of possible refinements going forward:

• Consultation on the costs associated with setting up and challenging a restructuring plan (to include suggestions to allow a plan to be sanctioned at a single hearing or to retain the two step process but to allow for the convening hearing to be conducted on paper only in the case of SMEs).
• Guidance to avoid information asymmetry between the debtor and creditor parties.
• Consultations on a multiple-debtor process to allow multiple entities to be party to the same restructuring plan without requiring separate applications.
• Consultation on mandatory upside sharing to incentivise creditors to lend their support to a restructuring plan.
• The government has decided not to do anything in relation to producing a standardised template for restructuring plans.

The government notes that a suggestion for improvement was in relation to recognition of restructuring plans overseas and whether to ascribe the plan extra-territorial effect, but this has not been taken up in the final table of possible actions.

Suspension of Termination Clauses

While it is too early to tell if this provision has met the objectives set for it, the review notes promising signs. The measure has been working reasonably well at preventing suppliers from holding struggling companies hostage. It has shown promise in ensuring continued supply and is largely seen as valuable in supporting company rescue. However, there is more ambiguity as to its ability to prevent ‘ransom’ demands from suppliers, and it is yet to be seen whether it adequately avoids transferring risk to suppliers.

While there are a few possible options for refinements which the government has discarded into the ‘do nothing’ column, the one possible action point is to provide further guidance on dealing with less sophisticated suppliers, where the ‘hardship provision’ – designed to protect suppliers that cannot continue to supply – is more likely to be invoked.

Company Moratorium

Finally turning to the moratorium, the review identifies a notable lack of evidence as to its effectiveness. The moratorium is seen by many as too short, and the absence of a stay on actions by financial creditors means it falls somewhat short as a rescue tool, especially outside of the SME space. While there have been successful uses of the moratorium, the Insolvency Service was unable to determine whether the original objectives have been met.

Consequently, there are six possible actions for refinement: (i) alteration of priority of debts to add more certainty to the funding of insolvency practitioners; (ii) clarification on the meaning of financial services to identify the liabilities excluded from the moratorium; (iii) looking at the eligibility criteria for applying for the moratorium; (iv) guidance in relation to the reputational risks of insolvency practitioners; (v) guidance on the role of the monitor; and (vi) guidance in relation to the length of the moratorium.

Conclusion

The Post Implementation Review presents the permanent CIGA provisions in an overall positive light on the third anniversary of its implementation. In particular, the centrepiece restructuring plan has largely lived up to its promise to be a powerful rescue tool, fit for the modern international restructuring landscape. There is less clear evidence on the other two measures, with the moratorium particularly seeing low usage numbers and a mixed response from insolvency practitioners.

In relation to the restructuring plan, it is interesting that a suggestion to give the restructuring plan extra territorial effect has not been taken up. However, a consultation on mandatory upside sharing would be watched closely by the industry; this is the most radical suggestion amongst the other more process-orientated ones. How this would work in practice is a matter for another day (and another consultation).