Company and Insolvency Rules: Permanent Measures
28th May 2020
The Corporate Insolvency and Governance Bill (CIGB), which was presented to Westminster on 20 May 2020 will be fast tracked and should be introduced at the beginning of June 2020.
In addition to a variety of measures to give temporary relief during the COVID crisis (see our separate note on these here), there are three permanent changes proposed to the insolvency landscape.
Companies will be able to seek a moratorium for 20 days without the need to enter an insolvency process. A moratorium is a period of debt relief during which creditors cannot take any action against an entity for debts owed. Directors will remain in control. Providing the conditions are met, the process will be relatively simple, the initial 20 day period can be extended and, with court of consent, last for up to a year.
A new scheme of arrangement
Once approved by the Court the scheme of arrangement binds all creditors. Until now the approval test has been 75% in value and a majority in number of creditors in each class. The approval test in the new scheme is 75% in value and a majority in number of all creditors (so creating “cross class cram down”) and is designed to end situations where large creditors who all agree with a company’s restructure plans are ‘out voted’ by a larger number of much smaller creditors. This will be of particular relevance to entities wishing to enter arrangements with significant creditors, free from concerns that dissenting creditors could scupper the plans. Importantly, the Court may approve the plan even where one class of creditors affected by it does not support the plan.
Suppliers prohibited from terminating supplies
Suppliers will be prohibited from terminating supplies because of an insolvency process or in the event of the moratorium mentioned above. This should enable businesses to trade better through such situations and keep going, rather than being forced to close.
More detail about the new Moratorium
The policy behind the new moratorium is to allow a company in financial distress a breathing space in which to explore its rescue and restructuring options free from creditor action with the intention that the moratorium will result in a better outcome and in some cases help avoid formal insolvency.
It is a standalone procedure enabling companies that are, or are likely to become, insolvent to apply for a moratorium of 20 business days that can be can be extended and could, with court consent, last for up to a year.
The process for obtaining the moratorium is simple and quick and does not require creditor consent or approval prior to filing.
The moratorium will not crystallise a floating charge or enable a lender to step in and appoint an administrator but the company will have to meet loan repayments during the moratorium.
There is protection for funding provided during the moratorium – it and expenses incurred would be treated like administration expenses and have “super-priority” over any subsequent liquidation or administration expenses.
Subject to a few restrictions, the moratorium will allow a business to trade in the ordinary course, albeit monitored by an insolvency practitioner, but without added pressure from trade or other creditors (including Landlords) who will not be able to bring legal proceedings, terminate leases or initiate insolvency proceedings.
The restrictions control how, when and if a company can dispose of its property and key assets.
Here is a key point summary of the new procedure:
What companies are eligible to apply for the moratorium?
All companies with the exception of financial services companies, those already in a formal insolvency process, and those that have been subject to a company voluntary arrangement (CVA), administration or otherwise in the period of 12 months prior to the filing date, are eligible to apply.
How can a moratorium be obtained?
In the case of a UK company not subject to a winding up petition, the directors can obtain a moratorium by filing at court:
• a notice that the directors wish to obtain a moratorium;
• a statement from the directors of the company that, in their view, the company, is or is likely to become, unable to pay its debts; and
• a statement from an insolvency practitioner that:
o they are qualified to act and consent to act as monitor; and
o the company is an eligible company and, in the proposed monitor's view, it is likely that a moratorium will result in the rescue of the company as a going concern.
Once these documents are filed at court, the moratorium comes into force.
What is the role of the monitor?
The role of the monitor, who must be an insolvency practitioner, is to oversee the process of applying for the moratorium and any extension (if required).
How long will the moratorium last?
The moratorium will last for an initial period of 20 business days which may be extended, without creditor consent, for a further period of 20 business days, or up to one year (starting with the first day of the initial period) with the consent of creditors or by the court.
The moratorium will automatically end if the company enters into a compromise, arrangement or relevant insolvency procedure (Company Voluntary Arrangement (CVA), administration or liquidation).
Also, if a CVA is proposed during the period, the moratorium will be automatically extended until the CVA proposal has run its course.
In difficult times, a period of breathing space can be a very welcome opportunity to take stock and determine whether the future is viable. So, the new moratorium procedure will be a useful tool in helping protect companies from short-term liquidity challenges and also helping ensure that all creditors (and not just those who are fastest to enforce) get the best return possible in the circumstances. It is about rescue of the company as a going concern and is not about business or asset sale.
The moratorium will also allow a planned exit if rescue does not prove possible. By that time there may be a queue of creditors waiting to enforce. So if, for example, compromise cannot be negotiated with a problematic creditor, then exit from moratorium will lead quickly to another insolvency procedure like CVA, administration or liquidation.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at May 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.