Corporate Insolvency and Governance Bill (‘CIGB’) (‘the Bill’)
The CIGB has been keenly anticipated after the Government announced in March 2020 that it intended to introduce further temporary provisions designed to alleviate and mitigate some of the economic damage being wrought by the COVID-19 pandemic.
The insolvency profession and business professionals have been pouring over the Bill following publication on 20 May 2020. It is likely that the Bill will receive both its second and third readings in the House of Commons in one day on 3 June before being debated by the House of Lords with a second reading now scheduled for 9 June. The expectation is that the Bill will receive Royal Assent at that time or by the end of June.
The vastly condensed legislative drafting timetable will (we are advised) inevitably arise in some shortcomings and unforeseen oddities which are intended to be addressed by the inclusion of extra powers to facilitate amendments by Order.
The Bill introduces a number of important new permanent provisions as well as some temporary, pandemic-driven, measures. These are summarised below:
Moratorium – a standalone moratorium on creditor enforcement action to give companies a breathing space to implement a turnaround plan to rescue the company as a going concern. It is not designed to be a gateway to an insolvency process, something of a first for insolvency law UK wide;
Arrangements and Reconstructions for Companies in financial difficulties – an additional measure to facilitate debt compromise with creditors incorporating an ability to bind dissenting classes of creditors if sanctioned by the court;
Termination clauses in supply contracts – designed to prevent suppliers of essential services terminating contracts upon an insolvency;
Wrongful Trading – suspension of personal liability for company officers for wrongful trading for the period from 1 March 2020 to 30 June 2020 (or to one month following commencement if later);
Winding-up petitions – temporary prohibition of petitions being heard after 27 April 2020 based on statutory demands served during the period 1 March 2020 to 30 June 2020 (or to one month following commencement if later), as well as a prohibition on petitions generally where a company’s financial difficulties have resulted from COVID – 19;
Company General Meetings and Filing Requirements – temporary extension of time periods and ability to hold meetings by virtual means.
The standalone Moratorium
In this article I am focusing on the new moratorium and the other provisions will be commented on separately.
The moratorium is potentially a ground-breaking way forward for distressed companies facing insolvency whose business models may have been severely disrupted by the pandemic. The directors of the company may obtain a moratorium simply by filing certain documents at court, (there is no hearing), including a statement that the company is, or is likely to become unable to pay its debts – in other words is insolvent. A court hearing will be required where a winding-up petition has already been presented, except that this will not apply during the current pandemic.
The moratorium will initially be for a period of 20 business days and this can be extended for a further 20 business days on application by the directors, again by filing the relevant documents in court. The moratorium can thereafter be extended for up to a year with the consent of creditors or otherwise to a date fixed by court.
Certain companies in financial regulated markets will not be eligible to apply but, unlike the small companies’ moratorium for CVAs which is to be replaced, there is no restriction on turnover (which had to be less than £10.2m) or level of assets (was £5.1m) and employees, (max was 50). Most companies will therefore be eligible to apply if they are insolvent and not already in a formal insolvency process.
This will be a ‘debtor in possession’ procedure where the debtor is the company. Its business will continue to be run by the existing management (directors) but the procedure does require the involvement of an Insolvency Practitioner (IP) to act as ‘Monitor’. The IP will need to be engaged by the company before it can apply for a moratorium and will need to consent to act. Upon the application for the moratorium being made by the directors, the IP who is the proposed monitor is required to state that in his or her view it is likely that the moratorium will result in the rescue of the company as a going concern. This could be viewed as something of a high hurdle to jump to obtain a moratorium and potentially an expensive barrier to entry for a cash strapped company.
Given the proposed monitor is new to the company they have an important judgement call to make on the ability of the company to implement a rescue plan, avoid insolvency and be rescued as a going concern and have to do so even before the moratorium is obtained. They must form a view, based on the available information, on the likelihood of the management team to be able to implement a rescue plan, obtaining funding as necessary, which will enable the company to turnaround and continue as a going concern.
It is probable that there will be a need to assess the position and form this view quickly if the company is faced with mounting creditor pressure. This is not a statement that a diligent IP would (or should) make lightly. The IP in this role becomes something of a filter to avoid frivolous or abusive applications by directors where there is no realistic prospect of a company being rescued.
Effect of moratorium
Once a moratorium is obtained, the directors continue to run the company and take steps to prepare and implement a rescue plan, subject to the oversight of the monitor.
The company must continue to pay the on-going costs of running the business but not pre-moratorium debts, with limited exceptions such as employee payroll liabilities. No credit may be obtained in excess of £500 unless the lender has been advised of the moratorium and security may only be granted with the consent of the monitor for the purposes of the rescue plan.
The monitor also has a role in notifying creditors and sanctioning the payment of certain essential pre-moratorium debts over £5,000, or 1% of the total debts if greater, again if required for the purposes of the rescue. There are further restrictions on the disposal of property without the monitor’s consent.
Extending and terminating the moratorium
The directors may extend the moratorium for 20 business days by filing documents at court including a statement by the monitor to re-confirm that the company is likely to be rescued. Thereafter creditor consent to a further extension (or extensions) up to a maximum of a year through a voting process. If it is intended that the company should enter into a CVA as part of the rescue plan, the moratorium is extended whilst this is pending and then ends. The court may also extend the moratorium.
Where the monitor forms the view that the moratorium is no longer likely to result in the rescue of the company as a going concern, or the rescue has been achieved, the monitor must bring the moratorium to an end by filing a notice in court. This also applies where the company is unable to pay its on-going liabilities or there is a failure to cooperate by the directors.
The notes accompanying the Bill make it clear that the moratorium is to be used as a rescue tool and not as a gateway to administration or liquidation. There are criminal sanctions available to address abuses to the process.
It remains to be seen how widely this measure will be adopted. We believe it could play an important role in the legislative landscape as companies seek to recover from the devastating economic blows brought about as a result of the pandemic.
As a firm we will certainly be considering its use as an option for companies where there is a (reasonable) prospect of rescue, but there are important drafting issues which may make it more sensible to look at other processes, whether that is a CVA without a prior moratorium, a reconstruction or administration.
In any event the monitor will need to act as a responsible gatekeeper to avoid abuses, and it is thought unlikely that the use of the moratorium as a tool will be widespread, and there is bound to be some caution required by the profession.
Will the moratorium be the answer to large scale corporate casualties post pandemic? Probably not. Other options may work better and many companies may sadly be beyond rescue.