By Cathryn Williams, Paul Muscutt and Beth Bradley
The full implications of COVID-19 may not be known for some time, but it has had an immediate impact upon UK insolvency law. The government has expedited the Corporate Insolvency and Governance Act 2020 (“the Act”) through Parliament in order to support distressed businesses and assist with the UK’s economic recovery. The Bill upon which the Act is based was only published on 20 May 2020, received Royal Assent on 25 June 2020 and thus became effective on 26 June 2020.
The speed at which the Bill passed through Parliament left little opportunity for meaningful consideration or critique. The vast majority of the Act’s provisions take effect from 26 June and we highlight below the key provisions.
The Act creates a moratorium to provide struggling businesses with breathing space. The moratorium is initiated by a company’s directors and a “monitor” filing papers at court which confirm (1) that the company is, or is likely to become, unable to pay its debts as they fall due and (2) that it is likely that the moratorium will result in a rescue of the company as a going concern.
The moratorium initially lasts 20 business days, commencing the day after the moratorium comes into effect. It can be extended for a further 20 business days by the directors making a further filing and for up to 12 months with creditor (or court) consent. During the moratorium, only the directors can take steps to place the company into an insolvency procedure.
Certain companies are excluded, including those subject to current or recent insolvency proceedings (within the past 12 months) and certain financial institutions.
The moratorium provisions give rise to 2 real concerns for existing secured lenders. First, the Act introduces a new “super priority” in relation to moratorium debts in the event that the company enters administration or liquidation within 12 weeks of the end of the moratorium. Such debts must be paid out of floating charge assets in priority to any distribution from those assets being made to the secured lender. This will significantly dilute the lender’s security in the event a new lender advances sums to the company during the moratorium. Further, the Act prevents a lender holding a floating charge from enforcing or crystallising that charge during the moratorium. If the lender seeks to accelerate payment of its debt during the moratorium period, that debt does not rank for super priority in the event of a subsequent administration or liquidation within the 12 weeks period following the end of the moratorium.
The Act enables the court to sanction a restructuring plan of a company (the “Plan“) that binds all creditors. Perhaps the most ground-breaking reform brought about by the Act is the notion of the “Cross-Class Cram-Down”, whereby the court can impose the Plan on dissenting creditors, provided that the court is satisfied that:
- A) if the Plan were to be sanctioned, none of the members of the dissenting class would be any worse off that they would be in the event of the “relevant alternative”; and
- B) the Plan has been agreed by a number representing 75% in value of a class of creditors or members who would receive a payment, or have a genuine economic interest in the company, in the event of the “relevant alternative”.
The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the Plan were not sanctioned – i.e. an administration or liquidation.
It appears that a Plan will not have automatic recognition in EU states under the European Insolvency Regulation and so even if a Plan is sanctioned by the Court, steps will have to be taken in those jurisdictions to have the Plan recognised.
The Act introduces temporary measures until at least 30 September to alleviate the pressure that the COVID-19 pandemic has placed upon UK businesses. The temporary measures include:
- Wrongful Trading
- The Act temporarily removes the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the pandemic.
- The measures apply to any worsening of the company’s financial position in the period between 1 March and 30 September 2020.
- This measure does not apply to excluded companies, including certain financial services firms.
- Ban on statutory demands and winding-up orders
- Creditors are temporarily prohibited from serving statutory demands and filing winding-up petitions where a company cannot pay its debts owing to coronavirus.
- Measures aim to safeguard companies against debt recovery actions during the pandemic and allow them the opportunity to seek agreements with their wider creditor group.
- The ban applies to winding up petitions presented from 27 April to 30 September 2020.
- Annual General Meetings (“AGMs“)
- The Act gives greater flexibility to hold Annual General Meetings and other meetings in a safe and practicable manner, including by way of virtual meetings, regardless of whether the constitution of the company would ordinarily permit such remote meetings.
- Measure applies to companies under a duty to hold an AGM between 26 March and 30 September 2020.
- Filing deadlines at Companies House
- The Act grants an automatic extension to public companies whose original accounts filing deadline fell before 30 June 2020.
- The Act also provides the Secretary of State with the power to make further extensions to key filing deadlines at Companies House, including the deadline for private companies to file their reports and accounts.
Subject to certain conditions, the Act prohibits suppliers from enforcing terms in contracts for goods or services which provide for automatic termination or permit the supplier to terminate the contract solely on the basis of the counter-party entering a relevant insolvency procedure.
The aim is to prevent suppliers from jeopardising the rescue of a business and to ensure that businesses can continue trading even if subject to a relevant insolvency procedure.
Will the Act achieve its aims?
The Act makes rapid and wide-ranging changes to UK insolvency legislation. We can only wait and see how the measures will work in practice, given the speed at which they have been rushed through Parliament. The impact of the new moratorium upon existing secured lenders may have unintended consequences for the appetite of lenders to fund certain assets. We can only wait and see whether the new measures will improve a company’s ability to work its way through financial difficulties
We will be providing a more detailed update for lenders on the new moratorium and its effects shortly.