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  • Overview

    Banking and Finance lawyer Katya Batchelor recently wrote a piece for Global Banking Review

    The Corporate Insolvency and Governance Act 2020 (the Act) came into force on 26 June 2020.  The Act introduces a number of procedures and measures, both permanent and temporary, which will have a significant impact on insolvency and restructuring law and practice.  The Act provides rescue opportunities for companies in financial distress.  There are also some temporary measures which were introduced in immediate response to the COVID-19 pandemic which include restrictions on using winding-up processes, changes to the wrongful trading rules and relaxation of meetings and filing requirements.  However, those measures are only temporary, intended to mitigate the effect of the insolvency regime, particularly in relation to the responsibilities of directors, in response to the current economic crisis.

    Key features of the new Act are discussed below.

    Moratorium

    A new standalone moratorium regime aims to give companies some breathing space from creditors in order to pursue a restructuring plan and maximise their chances of survival, so it is a marked shift from the previous trade creditor-focused process.

    The initial period for the moratorium is 20 days, with another 20 day extension available. Further requests can be arranged with the consent of creditors or the permission of the court.  During the moratorium the day-to-day management of the company remains with the directors under the supervision of a monitor, who is an insolvency practitioner.  The monitor is required to keep under review whether it remains likely that the moratorium will result in the rescue of the company as a going concern.  

    In order to protect the company whilst the directors attempt the rescue, the creditors and lenders will not be able to take enforcement action, including enforcement of any security, against the company in moratorium.  Any landlords of the company’s premises cannot exercise a right of forfeiture.  With certain exceptions (see below), the company will not have to pay debts falling due prior to the moratorium.

    However, certain debts of the company need to be paid during the moratorium.  These include rents in respect of a period during the moratorium, amounts due for new supplies made during the moratorium and moratorium debts (debts to which the company will become subject during the moratorium).  Most importantly, amounts due under financial service contracts, including loan agreements, are payable.  If the company is unable to pay such amounts the moratorium will end, therefore support and communication with lenders are essential where a moratorium is used. 

    Notably, the Act also creates a new priority status for the moratorium debts and for debts under financial service contracts.  If insolvency proceedings are begun within 12 weeks after the end of the moratorium, such debts will rank ahead of all other debts.  This priority applies to financial services debts which fall due in the ordinary course before or during the moratorium.  The priority does not apply if financial services debts are accelerated by the lender.

    Restructuring plan

    The new restructuring plan is another method by which a company can be rescued and is, in essence, similar to already widely-used schemes of arrangement; it is a court supervised restructuring process.  It is different from a scheme of arrangement in that the Act allows for a restructuring plan to be imposed on a dissenting class of creditors.  This is a new feature in the UK restructuring and insolvency context.  The new restructuring plan procedure will limit the ability of dissenting creditors to block a viable restructuring proposal.

    Dissenting creditors are able to be disenfranchised in this way only if they would not be worse off than in the “relevant alternative”.  The “relevant alternative” is what would be the most likely outcome for the company if the restructuring plan is not implemented. 

    One of the advantages of the new restructuring plan is its flexibility.  It can be combined with the new moratorium, which will prevent certain actions against the company while the restructuring plan is being progressed to approval.

    Termination Clauses in Supply contracts

    Under the new provisions of the Act, suppliers of goods and services are prevented from terminating or varying a contract or supply, or doing any other thing, because the customer has entered a relevant restructuring or insolvency process (this includes the new moratorium and new restructuring plan). They will also be banned from insisting on payments of sums falling due prior to insolvency as a condition of continued supply. 

    Suppliers will, however, be able to terminate contracts for new breaches which happen after the insolvency procedure begins, with the permission of the insolvency office holder or directors or with the permission of the court if the court is satisfied that continuation of the contract would cause the supplier hardship.

    Notable exceptions are, again, financial contracts, which means that lenders will continue to be able to terminate, and exercise other rights, upon a borrower’s insolvency.  Proposing a restructuring plan or moratorium is likely to trigger an event of default in most loan agreements.  However, it is worth remembering that the new priority rules (discussed above) do not apply if financial services debt is accelerated.

    Wrongful trading

    The Act provides for a temporary suspension of wrongful trading rules.  When considering the contribution that a director is required to make to company assets, the Act directs the court to assume that the director is not responsible for any worsening of the financial position of the company between 1 March 2020 and 30 September 2020. 

    Note that the Act reduces, but does not remove, the threat of personal liability arising from wrongful trading for directors who continue to trade through the Covid-19 pandemic not knowing whether the company will be able to avoid insolvency in the future.  The fraudulent trading and director disqualification regimes and general director’s duties continue to apply.

    This article first appeared in Global Banking and Finance Review https://www.globalbankingandfinance.com/understanding-the-corporate-insolvency-and-governance-act-2020/

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