The Corporate Insolvency and Governance Bill (CIGB) is due to pass into law in summer 2020. Originally consulted on in 2018, the Bill has been fast tracked to help businesses impacted by the COVID-19 pandemic. It makes some permanent changes to existing insolvency law, and introduces some temporary measures designed to help businesses cope with the after-effects of COVID-19. The most significant new measure is the introduction of a flexible corporate restructuring plan for insolvent businesses, similar to US Chapter 11 proceedings, that will allow a troubled business to re-emerge from an insolvency situation intact.
In addition, there is a new moratorium process that allows businesses a period of protection from creditors while they look for new funding. However, this won’t prevent insolvent businesses being pursued for bank loans and other types of financial debt.
- What are the key things that are changing due to the Bill?
- What are the key provisions in detail?
- How could the Corporate Insolvency and Governance Bill affect your business: FAQs
- My business has a cash-flow crunch, can these new laws help me?
- My company will be subject to a moratorium and under the supervision of a monitor. What decisions are we allowed to make during this period?
- What UK companies will potentially qualify for a moratorium?
- Will my entering into a moratorium affect my existing contracts like loan agreements and leases?
- Will I still have to pay bank loans and overdrafts during the moratorium period?
- Will I have to make lease payments while the moratorium is in force?
- When will the moratorium start?
- What’s the difference between the new restructuring plan and a scheme of arrangement?
- When would you use a restructuring plan rather than a CVA?
- Can my suppliers put up their prices because my company has become insolvent?
What are the key things that are changing due to the Bill?
Permanent changes to existing insolvency law
A new moratorium
If your business is struggling to pay its debts as they fall due, your directors can apply to the court for a company moratorium. A moratorium will keep most creditors at bay for 20 days, and this period is extendable. The process will be supervised by an insolvency practitioner (IP) who will oversee the company’s actions during the moratorium period.
The company’s and the directors’ decision-making ability will be limited during this period and you may need the monitor’s consent to do certain things, but you will receive a payment holiday from most debts, and your creditors (those who you owe money to) won’t be able to bring an action against you for debt repayment or to force you into liquidation.
Provided your company is not already subject to insolvency proceedings you will be able to invoke the moratorium process by making a filing at court, and the monitor must believe that that your company is capable of being rescued by the moratorium being granted.
Suspension of termination clauses in contracts
If your company is in an insolvency proceeding or there is a moratorium in place, your suppliers will no longer be able to terminate or change the terms of their contracts, for example by increasing prices. There is a temporary exemption for small businesses during the period of COVID-19, and loans from banks and financial institutions won’t be covered.
The aim of this new insolvency procedure is to help your business come out of insolvency and carry on trading. The new process will be overseen by the court that will need to approve it. You’ll be able to look for new funding during the procedure, and even if some of your creditors don’t agree with the plan, provided that 75% of them do, they’ll be bound by its terms.
Winding up petitions
If a creditor has made a petition for a winding-up procedure based on a statutory demand against you during the period between 1 March 2020 and 20 June 2020 (this date may be extended)(the COVID period), or based on any other petition made between 27 April 2020 and 20 June 2020, these will be void unless the creditor can show that COVID-19 has had no effect on your company’s financial position.
Your directors will not be liable for any losses your company suffers during the COVID period under the wrongful trading laws.
Filings and AGMs
You’ll be able to ignore certain provisions in your articles regarding how AGMs are arranged and hold them remotely, and your directors will be protected from any liability they may incur for failing to get shareholder approvals during the COVID Period. Deadlines for Companies House filings and similar filings will be extended during the COVID Period.
What are the key provisions in detail?
This new process allows directors of a company to continue in business, with an insolvency practitioner acting as ‘monitor’ to oversee operations. The new moratorium is designed to help companies restructure their business and maybe seek new funding rather than wind-up their affairs. During the moratorium, most (but not all) creditors will be prevented from taking further action against the company, allowing the company the potential to recover without having to liquidate.
Your company can enter a moratorium either by the directors making a filing into court, or by the directors asking the court to invoke the moratorium process (this is used where the company has an existing winding-up petition filed against it or is a foreign company). In the latter case, the court will only allow a moratorium to take place if it thinks the creditors would be better off than if the company was wound-up.
When making a filing into court, or making an application to court, the directors must declare that they want a moratorium and that the company can’t pay its debts. The monitor must also confirm that the company is eligible and can be rescued.
The moratorium will last for an initial 20 business days, and can be extended for another 20 days, and for longer if the creditors or the court allows. During the period of the moratorium, creditors can’t bring insolvency proceedings or enforce their security, and landlords can’t forfeit leases.
The moratorium can end early, and if the monitor thinks the company can’t be rescued, it must bring the moratorium to an end.
During the period that the moratorium is in force, a business must continue to pay any new debts, continue to pay rent and employees, and also pay its loans and other financial contracts. If these are not paid, the moratorium will come to an end. Furthermore, these debts occurring during the moratorium period will be given priority if the company subsequently goes into insolvency proceedings.
You can use the moratorium if:
- Your company is incorporated
- You declare that you can’t pay your debts and
- The monitor believes your company can be rescued
- Your company is not an insurance company, an e-money institution or involved in the capital markets, or a company that has issued certain types of bonds
- Your company hasn’t been involved in a prior moratorium, administration or Company Voluntary Arrangement in the last 12 months
When the company is subject to a moratorium, its debts are classified into three types:
- Moratorium debts (expenses and debts occurring during the moratorium period)
- Pre-moratorium debts without a payment holiday (these include bank loans and payments under other financial instruments, rent, wages, monitor’s expenses etc)
- Pre-moratorium debts with a payment holiday
The net effect of these rules is that creditors holding pre-moratorium debts with a payment holiday won’t be able to enforce their debts during the moratorium period, but certain types of creditors such as banks will, and will be able to accelerate loans to force the moratorium to an end.
A monitor must end the moratorium if they think that the company can’t be rescued, the company has now been saved, if the directors have withheld information that the monitor needs to do their duties, or if the company can’t pay moratorium debts or pre-moratorium debts without a payment holiday. It will also end when its term finishes, if the company goes into another insolvency process like a CVA, if the court orders it to end, or if the company enters into a restructuring plan or scheme of arrangement.
The monitor’s job during the moratorium is to oversee the company’s business so that it can make sure that at all times during the moratorium period the company is capable of rescue.
The new restructuring plan process
This new restructuring plan process is similar to the US Chapter 11 bankruptcy procedure that is designed to help companies in financial trouble restructure and revive their businesses. It will work in a similar way to a scheme of arrangement, and the court will be able to override the rights of secured creditors without their consent. To enter into the new process, 75% of each class of your creditors will normally need to agree, and the court will need to approve it.
Solvent companies can request a restructuring plan, as can insolvent companies provided they are in financial difficulties that may affect their ability to continue trading and that they propose a deal with creditors or members that will wipe out or mitigate the effect of the financial problems.
In order to get the court’s approval for a restructuring plan, a company must apply to court and summon a meeting of its creditors or members, followed by a meeting of all parties, and a subsequent court application to approve the resulting plan. All members and creditors can come to the meeting provided they have a financial interest in the company.
Seventy-five percent in value of each class of creditors or members must vote to agree to a plan. The court can even sanction the plan if some classes of creditors or members don’t agree with the plan, provided that the court is happy that the dissenting members would not be in a worse position if the plan was approved than they would in, say, a liquidation (a cross-class cram down) and if at least one other class of creditors or members has voted in favour.
Prevention of the termination of contracts or changes in terms for insolvency
When a company is insolvent, a supplier will no longer be able to terminate a contract or change contract terms such as to increase prices. The net effect of this is that businesses will have to continue supplying to insolvent companies, even if that company owes them a lot of money. Whereas in the past, these kinds of prohibitions applied to essential services like electricity supplies, they now apply to all supplies to insolvent companies, including those going into administration or subject to a CV, as well as those undergoing liquidation, the new moratorium, and other such insolvency proceedings.
Certain creditors are safeguarded from the new prohibition, and these will be able to end their contracts if the court allows and if the continuing of the contract would cause them hardship, or if the company agrees.
The aim of the new provisions is to help companies to continue to trade while insolvent so that they can find a solution to their financial problems. This will help ensure continued employment for staff as well as promote business rescue more generally.
How could the Corporate Insolvency and Governance Bill affect your business: FAQs
My business has a cash-flow crunch, can these new laws help me?
If your business is struggling financially, either because of COVID-19-related problems or more generally, these changes may be able to help you save your business as well as your employees their jobs. If your business qualifies, then you and your directors may be able to take advantage of various options such as limiting the ability of your creditors to pursue their claims and avoiding claims for wrongful trading.
My company will be subject to a moratorium and under the supervision of a monitor. What decisions are we allowed to make during this period?
Prohibited acts during a moratorium:
- Get credit of more than £500, including HP agreements and up-front payments for goods unless you tell the creditor that you are subject to a moratorium process.
- Offer security for a loan or debt unless the monitor agrees.
- Dispose of property unless the court orders you to do so, it’s in the ordinary course of your business or the monitor consents.
- Enter into certain types of financial transactions like a financial collateral arrangement.
- Pay pre-moratorium debts with a payment holiday of more than £5,000 or 1% of your total unsecured debt, whichever is greater, unless the monitor consents or it is in connection with a court-ordered process.
What UK companies will potentially qualify for a moratorium?
If you are a UK company (other than Northern Ireland) you may qualify for a moratorium unless you are a financial company like a bank or insurer, or if you’ve recently been in insolvency proceedings.
Will my entering into a moratorium affect my existing contracts like loan agreements and leases?
Depending on the wording of the particular contract, the invoking of a moratorium by your company may cause a default under the agreement.
Will I still have to pay bank loans and overdrafts during the moratorium period?
Yes, bank loans and payments under other financial instruments don’t qualify for a payment holiday if a moratorium is in place, and the lender may accelerate the loan but won’t be able to enforce any security it has against your assets without the consent of the court.
Will I have to make lease payments while the moratorium is in force?
Yes, you will have to continue to make payments due under any lease during the moratorium period. However, your landlord won’t be able to enforce any unpaid rent due from before the moratorium was put in place or forfeit the lease.
When will the moratorium start?
The moratorium will start when you file documents into court, or when the court order is made, whichever applies.
What’s the difference between the new restructuring plan and a scheme of arrangement?
- You don’t need to be anticipating financial problems to put a scheme of arrangement in place.
- For a scheme, you need the approval of the majority in number of each class of creditor to agree to it. This isn’t the case for a restructuring plan that requires the holders of 75% of the value of each class of creditor to agree.
- No cross-class cram down is possible with a scheme (forcing creditors from different classes to accept the scheme).
When would you use a restructuring plan rather than a CVA?
If you don’t think you are likely to get the majority of creditors to agree to restructure their debts, you may choose a restructuring plan under the new bill rather than a CVA because secured creditors and preferential creditors can’t block it.
Can my suppliers put up their prices because my company has become insolvent?
No. Under the new Bill, an existing contract for supplies can’t be terminated or varied by a supplier just because you have begun an insolvency procedure, even if their right to do so arose prior to you entering insolvency.