Assessing the impact of the UK’s new insolvency law

October 2020 | FEATURE | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

October 2020 Issue

Marking the largest change to the UK’s corporate insolvency regime in more than 20 years, the Corporate Insolvency and Governance Act (CIGA) came into force on 26 June 2020. It introduces new corporate restructuring tools and temporary easements to give distressed businesses the breathing space they need to seek advice and pursue a rescue.

The CIGA will fundamentally affect how financings to UK companies are structured and documented. It introduces a number of ‘debtor friendly’ measures to English restructuring and insolvency law, which up to now has been regarded as ‘creditor friendly’. Under the CIGA, directors will have the opportunity to restructure their business with the benefit of wide-ranging moratoria and stays of creditor and counterparty rights.

Introduction of the CIGA – the most significant piece of insolvency legislation since the Insolvency Act 1986 – has been driven by the government’s desire to minimise the economic fallout of COVID-19. The majority of its provisions commenced on 26 June 2020, however most of the temporary measures have retrospective effect from 1 March 2020.

Due to the speed at which it has been implemented by parliament, the legislation is light on detail in some respects, meaning the courts will play an important role in interpreting the Act and applying its provisions.

New and temporary measures

The CIGA introduces three permanent measures. First, a new freestanding moratorium. Second, a restructuring plan process, largely modelled on schemes of arrangement but with the addition of a cross-class cram-down. And third, restrictions on termination of contracts for the supply of goods and services.

The moratorium is perhaps the key change to UK insolvency law, which has long been criticised for failing to offer a US Chapter 11-style process for directors of a company to remain in control of the business to implement a rescue or restructuring plan.

The freestanding moratorium for distressed but viable companies can now be used to support the rescue of a company as a going concern. It aims at recovery of the company rather than the realisation of assets, denoting a shift to a more debtor-focused process.

“The threshold for directors proposing a restructuring under CIGA is relatively low. They must only show that the company is in financial difficulties which affect, or are likely to affect, its ability to continue as a going concern.”

The initial period for the moratorium will be 20 business days, but this can be extended or terminated early. An initial 20 business day extension is available without consent, so many moratoria may last 40 business days. Further extensions are available with the consent of creditors or the permission of the court.

Notably, the moratorium is not just available to English companies, but also to overseas companies, provided that they have a sufficient connection with the English jurisdiction.

The moratorium does include some eligibility requirements, however. If a company is going through another insolvency process at the time of the filing or is subject to an interim moratorium (for administration) or has an outstanding winding-up petition, it will be ineligible. Companies that have been subject to a company voluntary arrangement (CVA), administration or another moratorium in the last 12 months will also be ineligible (other than during the COVID-19 period).

The moratorium is achieved by filing documents with the court (or on application to court if the company is already subject to a winding-up petition), and the process is supervised by an independent ‘monitor’ – namely, a qualified insolvency practitioner.

The CIGA also introduces a new restructuring plan for companies in financial difficulty, inserting a new Part 26A into the Companies Act 2006 (Arrangements and Reconstructions for Companies in Financial Difficulties). The new procedure is similar to the existing scheme of arrangement, but is differentiated by a new provision allowing for classes of creditors to be crammed down.

The threshold for directors proposing a restructuring under CIGA is relatively low. They must only show that the company is in financial difficulties which affect, or are likely to affect, its ability to continue as a going concern. A majority of 75 percent in value of classes of creditors is sufficient.

In response to the COVID-19 pandemic, the government has included the following other temporary measures in the CIGA: (i) restrictions on using winding-up processes; (ii) temporary changes to wrongful trading rules; and (iii) a relaxation of meetings and filing requirements to give companies greater flexibility.

The CIGA does have implications for defined pension benefits. Trustees of defined benefit pension schemes will need to consider carefully the potential impact on their scheme if a sponsoring employer were to take advantage of either option, and may well be advised to take updated covenant advice.

CIGA also extends the time periods for filing various documents at Companies House, including company accounts, to ease the burden on companies at this time, as well as relaxing certain requirements around shareholder meetings.

The measures contained within the CIGA will apply until 30 September 2020, however the government is facing calls to extend that period until the end of 2020, at least.

Richard Summerfield