Changes to insolvency law – key points to keep in mind

18 November 2020

In June 2020, the Corporate Insolvency and Governance Act (CIGA) received Royal Assent and came into force, bringing about the biggest changes to the UK corporate insolvency regime for over 20 years.

Designed to provide businesses with the space and support they need during the current crisis and beyond; these far-reaching changes were pushed through parliament in just six weeks. Some of these were temporary measures to protect businesses in the short term, while others were permanent initiatives to provide new corporate restructuring tools for directors of companies currently facing cash-flow challenges.

So, what exactly has changed and how will it affect your business? Below, we run through the key measures set out in CIGA and areas you need to be aware of.

1. Understanding the new statutory moratorium

With the onset of Covid-19, a series of new measures were brought on to suspend creditor actions, wrongful trading claims and to suspend winding up petitions. However, unrelated to the health crisis and brought in as an entirely new and standalone procedure is the moratorium regime.

Long before the pandemic, there was talk within the restructuring community that the UK needed and was lacking a process by which directors for companies in distress could have the breathing space to explore rescue and restructuring options without the immediate pressure of creditor actions and insolvency proceedings.

The new CIGA does just this, creating a simplistic and streamlined process whereby directors can make decisions about the viability of the company rather than immediately entering into insolvency.

How is a new moratorium obtained?

The new Act requires directors to file certain prescribed notices and statements to the court that state:

  • That the company is eligible to obtain a moratorium (certain businesses including banks, insurance providers and money-related institutions will not be eligible.)
  • That the directors wish to obtain a moratorium, and
  • That, in the director’s opinion, the company is likely to become cash flow insolvent.

They must also be able to confirm that a monitor is helping the directors with the moratorium. This is a new concept introduced as part of the CIGA; it states that a qualified insolvency practitioner must assist the directors through the moratorium and file a statement that confirms their belief that the moratorium will result in the rescue of the company. The monitor plays the role of an overseer; directors remain in day-to-day control during this period.

How long does a moratorium last?

Once the relevant notices have been filed to the court and the monitor has notified creditors and companies house of the situation, the moratorium will come into force. The moratorium will remain in force for 20 business days from the day after it is made official, unless it is terminated or extended.

The moratorium can be terminated by a director, if during this period, they decide that insolvency is inevitable. The monitor also has the authority to terminate the moratorium is they think it will no longer result in rescue, or if rescue has already been achieved. They can also choose to terminate the moratorium if the directors are not cooperating and preventing them from carrying out their role in the process. Termination can also occur if moratorium debts and pre-moratorium debts are not being paid during this time.

 

What if a customer that owes you enters into a moratorium?

The new laws place several restrictions over actions that can be enforced by creditors on to a company while there is an ongoing moratorium. If a company owes you money, insolvency proceedings cannot be brought against the debtor, and no steps can be taken without the court’s explicit permission to enforce securities against the company. Restrictions on legal proceedings will mean you have to wait until the moratorium has expired or is terminated before you take formal action. The only exception here is if there is already a tribunal claim that is underway, or if the court gives permission to take action. There are also restrictions imposed on the company and directors as to what transactions they can undertake. Whether you are a creditor or debtor in this relationship, advice from a specialist legal advisor is essential.

2. Restructuring plans: who is elgibile and how are they approved?

Clause 7 and 9 of CIGA introduce a new part 26A into the Companies Act 2006, pursuant to which a company facing considerable cash flow challenges can propose a restructuring plan as an alternative tool to a CVA and scheme of arrangement.

Who is eligible for a restructuring plan?

All companies liable to be wound up under the Insolvency Act 1986, including foreign companies, are eligible to take advantage of this option, as long as they satisfy the following conditions

  • the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and
  • a compromise or arrangement is proposed between the company and (a) its creditors, or any class of them, or (b) its members, or any class of them, and the purpose is to eliminate, reduce or prevent, or mitigate the effect of any such financial difficulties.

Just like a scheme of arrangement, the process for approving a restructuring plan requires an application to the court, followed by a meeting of creditors to discuss the proposed plan before it can be authorised.  All creditors and parties affected by the financial distress of the company must be granted access to this meeting.

If three quarters of participants who vote agree to the restructuring plan, the court may sanction that agreement. If participants are dissenting of the agreement, there is still a chance the court might sanction the plan if they feel the dissenting parties would not be economically worse off if the plan isn’t sanctioned.

Once sanctioned, a restructuring plan binds all creditors/members and the company.

3. Termination clauses in supply contracts

The final permanent change introduced as part of the CIGA is the introduction of a new section 233B into Insolvency Act 1986, pursuant to which any provision in a contract for the supply of goods or services ceases to have effect where a company is subject to an insolvency procedure if the contract would terminate due to insolvency. This critical addition is designed to give companies going through financial difficulty a lifeline through a restructuring or insolvency procedure, and to maximise the opportunity of rescue.

The key change here is that a supplier cannot require pre-insolvency debts to be paid as a condition of making further supplies.

A contract only be terminated by a supplier if the company consents to termination, of if the court is satisfied that continuation of supply would not be in the company’s economic interests. There are, of course, exclusions of the provisions, such as if the company or supplier are operating in the financial services sector or if the relevant contract involves financial services.

These significant reforms are a step-change in British insolvency law, and edge closer to the model of the US’s Bankruptcy Code. What has historically been a legal landscape that prioritises creditors, the permanent provisions finally provide tools to directors under financial distress to achieve more of a balanced environment. Whether your company is facing cash-flow troubles or are owed money by a company who is headed towards insolvency, get in touch. Our specialist insolvency lawyers can put together a bespoke plan of action that benefits your business. Use our online chat or quick contact form to arrange a free consultation with out experts at your convenience.

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