The ground-breaking Corporate Governance and Insolvency Bill is now going through Parliament, ushering in a series of amendments to insolvency and company law in response to the coronavirus outbreak
Colin Haig, president of insolvency and restructuring trade body R3, said: ‘This bill represents the biggest change to the UK's insolvency and restructuring framework for almost twenty years.
‘The measures contained in the Bill will support the profession's efforts to help businesses navigate the enormous economic damage caused by the pandemic - this legislation comes not a minute too soon.’
The legislation introduces a new moratorium to give companies breathing space from their creditors while they seek a rescue.
Businesses will have a 20-business day opportunity to consider a rescue plan, extendable to 40 business days, with further extensions at the agreement of creditors or the court.
The company will remain under the control of its directors during the moratorium, but the process will be overseen by a monitor who must be a licensed insolvency practitioner.
The bill also introduces a permanent change to the use of termination clauses in supply contracts. As a result of the measure, where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or vary the contract terms with the company, for example increasing the price of supplies.
The customer is required to pay for any supplies made once it is in the insolvency process but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.
The measure also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the emergency.
Other measures include introducing a new restructuring plan that will bind creditors to it and enabling the insolvency regime to flex to meet the demands of the emergency.
The measure will allow struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue option for companies that are suffering financially. The plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.
It will introduce a cross-class cramdown that will allow dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.
Steve Russell, head of business restructuring services at PwC UK, said: ‘The creation of a new monitor role takes into account the long held view that a “debtor in possession” process is needed as part of a UK insolvency toolkit which we welcome and intend to consent to act as a monitor in appropriate cases.
‘The extension of protections on the supply of essential services to cover the supply of other services to a company in the moratorium (as well as to companies in an insolvency process) should minimise the ability of suppliers to use an insolvency to gain an advantage over other suppliers with less commercial leverage.
‘We also welcome the addition of the new restructuring plan tool which should make it easier for companies to agree compromises with creditors by simplifying voting processes and focusing on the interests of affected creditors. This should also reduce the costs of getting these creditor compromise agreements approved.
‘The legislation as drafted recognises the important role that the existing CVA tool can play in the restructuring process if used correctly. By using this as part of a wholesale restructuring process it should significantly improve the success rates of CVAs which have previously been much maligned.’
The new regulations temporarily remove the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency. This will be for any period of trading between 1 March to 30 June.
They also temporarily prohibit creditors from filing statutory demands and winding up petitions for coronavirus related debts.
The bill introduces temporary provisions to void statutory demands made between 1 March 2020 and 30 June and also restricts winding up petitions from 27 April 2020 to 30 June 2020. These temporary measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of coronavirus.
To ease burdens on businesses during the pandemic, the legislation allows them to hold closed Annual General Meetings (AGMs), conduct business and communicate with members electronically, and extends filing deadlines.
The measures relating to company meetings are intended to be retrospective from 26 March so that any company that has already had to hold an AGM in a way that adhered to social distancing measures, but that, as a result, did not meet relevant obligations in their constitution, will have done so in accordance with the law. Companies who were forced to postpone AGMs which were due to be held after 26 March will be given a limited period after the Bill is passed to hold those AGMs using the new flexibilities.
The legislation also allows for the temporary measures to be retrospective from their respective dates of announcement.
The Bill enables the Secretary of State to make regulations to extend deadlines for three types of filing: accounts; confirmation statements (including event-driven filings that are required to be submitted in advance of the confirmation statement); and registrations of charges.
Currently failure to file certain information with Companies House by the relevant deadline can result in the company paying a late filing penalty or the directors being prosecuted.
Even though Companies House is taking a proportionate approach to compliance, a failure to meet statutory deadlines can have broader impacts on a company’s record or credit rating, and this measure is designed to address this.
Jonathan Geldart, director general of the IoD, said: ‘Directors have significant legal obligations, and this Bill provides some reassurance that those who act responsibly won’t be caught out by the insolvency system.’
Mike Cherry, national chair of the Federation of Small Businesses, said: ‘The measures will immediately go some way to mitigate some of the problems small businesses are facing, such as the relaxation of wrongful trading rules which will allow directors of struggling companies to continue trading without fear of legal repercussions.
‘The company moratorium, filing extensions and voiding of statutory demands are particularly important for smaller businesses, it is important that these provisions continue for as long as is necessary.’
Certain financial services firms and contracts have been excluded from some of the reforms, as the sector’s regulators have existing powers to intervene in the business of financial services firms in distress, and the UK has a number of existing special insolvency regimes for certain of these firms.
The company moratorium will not be available to certain financial services firms, and will not affect certain financial contracts. The new termination clauses measures will also not apply to financial contracts or to financial services firms.
However, financial services firms will have access to the new restructuring plan, though with appropriate safeguards including a role for the financial services regulators.