Home to The Successful Founder Magazine 
Inspirational Insights & Profiles for Aspiring & Successful Female Entrepreneurs
Insolvency law changes give distressed businesses breathing space

Insolvency law changes give distressed businesses breathing space

21 June 2020|Legals & Compliance, Money

The Corporate Insolvency and Governance Bill
The Corporate Insolvency and Governance Bill

By Benjamin Wiles, Managing Director, Restructuring Advisory, Duff & Phelps. The Corporate Insolvency and Governance Bill was introduced on 20 May 2020 and is a welcome development that will deliver several changes to UK company law, enabling companies undergoing a restructuring and rescue process to continue trading. 

Some of the measures contained in the Bill have been in consultation for some time, originally outlined in a March 2018 consultation, while others have been introduced specifically to cater for the coronavirus crisis. This means that some of the measures will also only apply for an initial temporary period, but the UK parliament retains the power to extend these periods if it deems necessary. The reforms also reflect a number of provisions contained in a European Commission Directive from November 2016.

Under this Directive, the Commission proposed that the insolvency legislation of each European Union member state should include three of the key elements set out in the government’s proposals—a moratorium, a prohibition on “ipso facto” clauses and the ability to confirm a restructuring plan “if it complies with the cross-class cram-down requirements.”

The Bill contains a number of temporary changes to prevent winding up petitions and statutory demands, together with the temporary suspension of wrongful trading provisions. This will restrict claims brought against an insolvent company’s directors for any losses caused by trading during the suspension period. In addition, the Bill will ease regulatory requirements enabling companies to delay annual general meetings until late September 2020 or hold “closed AGMs” online.

Of the three permanent changes to the insolvency regime, the most impactful is the introduction of a “company moratorium.” This provision states that insolvent companies or companies that are likely to become insolvent can obtain a 20 business day moratorium period to allow viable businesses time to seek new investment free from creditor action or to restructure. 

To qualify for the moratorium, the directors will need to make a statement that the company is, or is likely to become, unable to pay its debts and the “monitor” must make a statement that a moratorium would likely result in the rescue of the company.

Furthermore, the directors will be able to extend the initial 20 business day moratorium for a further 20 business days if they file a notice at court. This cannot be done until the last five business days of the initial period of the moratorium. Any extension of the moratorium beyond 40 business days will require the consent of the creditors or the court.

The exit from the moratorium may be achieved in a number of ways including a rescue, sale, refinance, company voluntary arrangement (CVA), scheme of arrangement or a restructuring plan.

Whilst the company remains under the control of its directors throughout the moratorium, it is envisaged that the appointed “monitor,” who must be a licensed insolvency practitioner, will be comfortable that a rescue is achievable and then monitor the process throughout. 

This means that protection is provided to the company and creditors are unable to commence legal action via winding up petitions or by other enforcement avenues available to them.

The second new provision in the Bill will enable companies in financial difficulty, or their creditors, to form a “restructuring plan.” Although similar to a scheme of arrangement, the major difference is that it can impose the restructure on any dissenting creditors, be it secured or unsecured, who voted to reject it. However, the dissenting creditors cannot be put into a worse position than what the court considers would have been the most likely outcome if the plan was rejected.

The third key element of the Bill is a change to existing supplier contracts so that termination clauses do not trigger, and supply issues or price increases cannot be implemented. This means that contracted suppliers will have to continue to supply companies despite the pre-insolvency arrears, unless they can demonstrate “hardship” as a result.

The changes introduced are designed to avoid insolvency and preserve employment and potential enterprise value by enabling businesses to continue trading even if they are undergoing a rescue or restructure process, and should therefore be welcomed. But the key test will be in the detail and practical implications of the new measures.

The next challenge is how fast these proposed changes can be made. With Parliament now sitting, this significant support for the UK economy is being fast tracked through with the aim of enacting the Bill in July at the earliest.