Breaking down the Corporate Insolvency and Governance Act

The Corporate Insolvency and Governance Act came into force on 26 June 2020. It brought about the biggest reform to the UK’s insolvency regime since the Enterprise Act 2003.

While our last post discussed the temporary changes introduced, this blog will examine the permanent changes it presented.

The moratorium

Creditors are barred from taking certain actions to recover specific pre- and post-moratorium debts that fell due during this period. A monitor (a licensed insolvency practitioner) will be appointed to overlook the process.

What can’t creditors do during this period?

The effect of the moratorium on creditors is similar to the existing administration moratorium. For example, creditors can’t present winding up petitions or take steps to enforce their security without the court’s permission.

Creditors are only allowed to seek court’s permission to start proceedings for pre-moratorium debts excluded from the suspension.

What are the debts excluded from this suspension?

The following are excluded from the moratorium and must continue to be repaid:

  • debts that arose from contracts that involve financial services eg banks
  • debts for goods and services supplied during the moratorium
  • rent
  • wages and redundancy payments
  • the fees and expenses of the monitor’s

How long are creditors banned from acting?

The suspension will last an initial period of 20 business days. Directors can extend it by making an application to the court (with or without creditors’ consent) within the last 5 business days of the initial moratorium.

Without the creditors’ consent, the moratorium can be extended for a further 20 business days. Any extension beyond 40 business days, up to a maximum of a year, will require the consent of pre-moratorium creditors.

Extensions can also be granted by court orders.

The moratorium will automatically end if the company enters into insolvency procedures or when the monitor no longer thinks the company can be rescued.

Can all companies apply?

Most companies are eligible, except:

  • financial services companies eg banks and insurance companies
  • companies that are already in a formal insolvency process eg administration and liquidation
  • companies that were subject to a moratorium or an insolvency proceeding (including CVA) 12 months before the application

How can companies apply?

The company’s directors can apply by filing the following documents with the court:

  • a notice that they wish to obtain a moratorium
  • a statement that they believe that the company is or will likely become unable to pay its debts
  • a statement from the proposed monitor

The monitor’s statement will include:

  • their consent to as the monitor
  • the company’s eligibility for the moratorium
  • their view that the moratorium would likely result in rescue of the company

Once the documents have been filed, the moratorium becomes effective.

The restructuring plan

This is a new tool for companies that are struggling to reach a compromise with its creditors. Its main advantage is its ‘cram-down’ feature, meaning that it binds all creditors including those that voted against it.

What companies are eligible?

Two conditions must be met before a company can rely on the plan:

  1. the company must be in financial difficulties or is likely going to be in financial difficulties which affect their ability to carry on their business
  2. the plan must be used to eliminate, reduce or prevent the effect of the financial difficulties

How do companies put the restructuring plan into effect?

The company (its administrator or liquidator), its directors, shareholders or creditors must apply to the court for an order to hold a meeting where the plan is voted on.

The notice for the meeting must include a statement that sets out the key elements of the arrangements. Any creditor or shareholder who may be affected by the arrangement must be allowed to participate. Those with no economic interest in the company can be excluded.

At least 75% in value of creditors in each class must support the plan in order for it to be put into place. Once this threshold is reached, the court can exercise its discretion to approve the plan despite those that voted against it.

How do the courts decide when to cram-down on dissenting creditors?

When determining whether to sanction a plan, the court will consider:

  • whether the arrangement will place the dissenting creditors in a worse position than if an alternative scheme is implemented
  • whether at least a class of creditors would receive payment or have economic interest in the company if the alternative is put into place instead

The alternative scheme refers to whatever the court considers would likely occur if the plan was not approved.

If a court application was made within 12 weeks after the end of the moratorium, the plan must not affect the claims of creditors whose debts aren’t subject to this suspension.

Limiting the use of termination clauses in supply contracts

If a company has recently entered into a ‘relevant insolvency procedure’, its suppliers are prohibited from:

  • triggering the termination clause based on events that happened before the start of the process
  • ending their contract on the grounds of the company’s insolvency
  • varying their contractual terms

A contract can only be terminated with the court or company’s (including its administrator, liquidator or administrative receiver) consent.

What is considered as a ‘relevant insolvency procedure’?

‘Relevant insolvency procedure’ means administration, liquidation, administrative receivership, CVA, moratorium and restructuring plan.

What happens to the payments that have fallen due?

Companies undergoing financial difficulties will have to pay for any goods or services received while undergoing a relevant insolvency procedure. However, they aren’t required to pay their pre-insolvency arrears during this period.

Are there any exceptions to this rule?

Yes. Contracts excluded from this prohibition include:

  • contracts with ‘excluded entities’ eg banks and insurance companies
  • contracts for specific financial products and services eg lending and securities contracts

Some small suppliers are also exempt until 30 September.

Chloe Lai