The UK Government published the Corporate Governance and Insolvency Bill on 20 May 2020. The legislation will be fast tracked and include both temporary and permanent changes to the UK insolvency legislation.
The temporary measures, aimed at supporting businesses struggling with cash flow and facing distress due to COVID-19, include prohibitions on presentation of winding up petitions and winding up orders, suspension of wrongful trading laws and the ability to apply for a moratorium.
Following the Government announcing that wrongful trading laws would be suspended and that winding up petitions would be prohibited, those measures are not surprising. However, the new moratorium (that will also become a permanent fixture in the insolvency legislation) will also temporarily be available to companies that are currently subject to winding up petitions and companies can apply for an extension of the moratorium, disregarding any worsening of the financial position of the company as a result of COVID-19.
The temporary change to the eligibility criteria for the new moratorium were not announced by the Government prior to publication of the Bill, but it will be welcomed by many businesses that simply need breathing space to re-organise and will offer many the chance to do that and avoid formal insolvency.
We will be publishing a more detailed blog on the temporary changes, in particular addressing whether some of the questions around winding up petitions have been answered in the legislation.
Aside for the temporary “covid” measures, the Bill introduces three permanent changes to the UK Insolvency Laws:
- A new moratorium
- Ipso Facto (termination) clauses; and
- A new restructuring tool
The new moratorium, mentioned above, is a standalone procedure enabling companies that are, or are likely to become insolvent to apply for a 20 business day moratorium. The process for obtaining the moratorium is simple and quick and does not require creditor consent or approval prior to filing – although it would be sensible for companies to engage with key stakeholders (particularly bank and other financiers) if they are not already doing so before applying.
The moratorium will allow a business to trade in the ordinary course, albeit monitored by an insolvency practitioner, but without added pressure from trade creditors who will not be able to bring legal proceedings or initiate insolvency proceedings. Landlords will also be prohibited from forfeiting any leases (although that is currently the case under existing temporary measures in place).
There are some restrictions – such as on how, when and if a company can dispose of its property but largely companies will be free to continue trading in the ordinary course.
For lenders (with debts or other liabilities arising under a contract or other instrument involving financial services) unless the company has already agreed a payment holiday) the company will have to meet repayments during the moratorium. Although the moratorium will not crystallise a floating charge or enable a lender to step in and appoint an administrator.
The policy behind the moratorium is to allow a company in financial distress a breathing space in which to explore its rescue and restructuring options free from creditor action with the intention that the moratorium will result in a better outcome and in some cases help avoid formal insolvency.
Ipso Facto – prohibition on termination of supply contracts
Another new measure, that enables the business to continue to trade during the moratorium, is the introduction of new rules protecting the supplies of goods and services to the business. The so called ‘ipso facto’ provisions prevent a supplier from terminating a contract because the business has obtained a moratorium – regardless of the terms of the supply contract.
This prohibition (once enacted) will also apply to existing insolvency processes preventing suppliers of goods and services from terminating a contract because the company has entered an insolvency process, subject to safeguards to protect suppliers in the event that te supplier can demonstrate that they will suffer hardship as a consequence of not being able to terminate.
It will come as a relief to lenders (particularly asset based lenders) that financial contracts are excluded from the proposed new provisions. Those financiers retain the ability to terminate existing arrangements on the grounds of insolvency, and are not bound to continue to support the business if it enters an insolvency process.
This will be a new tool in the Insolvency framework allowing struggling companies to put forward a proposal – the restructuring plan – to its creditors and members.
The measure includes a feature that introduces a “cross-class cram down” mean that dissenting creditors who vote against it, will be bound by the plan if it is approved and sanctioned by the Court.
Unlike current, similar processes (CVAs and schemes of arrangements) the plan will also bind secured creditors.
The plan is intended to follow in the steps of a scheme of arrangements which, as a restructuring tool, offers flexibility and is highly regarded outside of the UK as an effective and successful restructuring process.
As with all new legislation, the devil will be in the detail and whilst the new processes and procedures may offer some initial challenges, on the whole the changes are to be welcomed.
As we analyse the legislation further or if fundamental changes are made to it as the Bill passes through the legislature, we will be providing further insight and blogs and helpful guides to help navigate the new insolvency regimes.