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Corporate Insolvency and Governance Act 2020

Permanent Changes to Insolvency Law

Posted on: 8 July 2020
Service area: Legislation

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The Corporate Insolvency and Governance Act received Royal Assent on 25 June 2020 and introduced into law a new measures to tackle corporate insolvency. Some of the permanent changes have been in the development stage for a number of years and were pushed through in contemplation for what some predict will be a severe and substantial recession following lockdown. Some changes are temporary and are being introduced specifically to respond to the current Coronavirus crisis.

The temporary changes are covered in our separate note ‘Corporate Insolvency and Governance Act 2020: Temporary Changes’. This note addresses the proposed permanent changes.

New Statutory Moratorium

The act introduces a new part A1 to the Insolvency Act 1986, which enables a company to obtain a free standing Moratorium to provide breathing space whilst it explores rescue and restructuring options. The concept is new in UK insolvency law (it echoes similar provisions in force in the USA and Europe) in that the directors remain in control of the company during the Moratorium subject to a Monitor (a qualified Insolvency Practitioner) monitoring the company’s affairs.

In order for the company to obtain a Moratorium, the Monitor must state that in their view it is likely that the Moratorium will result in the rescue of the company as a going concern. All companies are eligible (save for certain insurance, payment and investment firms and other financial institutions) unless they are, or have been, subject to current or recent insolvency proceedings.

The Moratorium is initially 20 business days, but there is the possibility of an extension for a further 20 business days which can be achieved simply by filing documents at court in the last 5 business days of the original period.

The Moratorium provides a payment holiday for pre-Moratorium debts (other than certain categories of debt which are expressly excluded from the Moratorium) and prevents enforcement proceedings for pre-Moratorium debts, insolvency proceedings, enforcement of security by secured creditors and other legal proceedings.

There are certain debts which are not subject to a payment holiday comprising:

  • the Monitor’s remuneration
  • goods or services supplied during the Moratorium
  • rent in advance of the Moratorium period
  • wages or salary
  • redundancy payments
  • debts and other liabilities arising under a financial services contract.

During a Moratorium, a company can only pay pre-Moratorium debts which are subject to the payment holiday provisions with the consent of the Monitor or the court if the amount which is to be paid exceeds the greater of £5,000 or 1% of the value of unsecured debts when the Moratorium began. This does not include payments to a security holder from the sale of charged assets with the consent of the security holder.
There are a couple of important points in relation to the debts excluded from the payment holiday. Debts or other liabilities arising under a Financial Services contract include: loans, factoring and financing of commercial transactions as well as financial leasing. Secondly, unlike (for example) the position in administration where rent is only payable in respect of premises to the extent that they are utilised for the purpose of the administration, rent remains due and payable in the Moratorium period.
The intention behind the Moratorium is to give a company breathing space to explore its restructuring options. It is intended as a ‘light touch’ process which can be put into effect quickly and without necessarily identifying a particular insolvency process or exit at the outset.

Restructuring Plan

The Act introduces a new part 26A into the Companies Act 2006 pursuant to which a company in financial difficulty can propose a Restructuring Plan. The plan can facilitate the company compromising certain creditors, or classes of creditors, or members or classes of member. A Restructuring Plan is available to any company which is liable to be wound up under the Insolvency Act 1986 which includes foreign companies.
A Restructuring Plan could be available to both solvent and insolvent companies who satisfy two conditions:

  • the company has encountered, or is likely to encounter, financial difficulties that are affecting 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 effects of any such financial difficulties.

The process to gain approval to a Restructuring Plan has similarities to the existing scheme of arrangement. It involves an application to the court to summon a meeting of creditors or members, or class meetings, followed by an application to court to sanction the Restructuring Plan. All affected creditors/members are permitted to participate in the required meeting to approve the plan unless the court is satisfied that no member of the relevant class has a genuine economic interest in the company.

If 75% in value of the creditors/members (or classes of creditors/members) invoked in the process agree a Restructuring Plan, the court may sanction the plan. If there are dissenting creditors/members (or classes of each) the court can still sanction the plan if:

  • the court is satisfied members of the dissenting class would not be worse off in the event of the relevant alternative (which is broadly what the court might consider would happen if the plan is not sanctioned); and
  • the compromise has been agreed by 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 important differences between a Restructuring Plan and a scheme of arrangement are:

  • for a plan there is a condition of financial difficulties current or anticipated – no such condition applies to a scheme.
  • for a scheme of arrangement there has to be approval by 75% of each class of creditors/members to vote in favour and a majority of creditors by number of each class. For a Restructuring Plan there is no requirement for a majority of creditors by number.
  • The court has the ability to exclude creditors/members from the process if they have no future financial interest if the plan is not approved.
  • A Restructuring Plan can bind a class of creditors or members to the plan even if not all classes have voted in favour of it.

Termination Clause in Supply Contracts

The Act inserts a new section 233(b) into the 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 becomes subject to an insolvency procedure, where that the contract would either terminate automatically due to the insolvency or if the supplier would be entitled to terminate.
Critically a supplier can only terminate a contract if the office holder or the company consent, or if the court is satisfied that the continuation of supply would cause the company hardship. There is no requirement for an office holder (or director) to provide any form of personal guarantee.
A supplier cannot require pre-insolvency debts to be paid as a condition of making further supplies.

There are exclusions of these new provisions where:

  • the company or the supplier are involved in financial services (e.g. are an insurer, bank, investment firm, or a payment institution): or
  • the relevant contract involves financial services (e.g. a loan agreement, swap agreement, derivatives, or spot contracts).

With regard to the Coronavirus period there is a temporary exclusion of the provisions of the new section 233(b) for small suppliers where the insolvency procedure occurs during the period from 25 June 2020 to 24 July 2020..

For more information please contact:
andrew.livesey@taylors.co.uk or stuart.beatson@taylors.co.uk

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