On 25 June 2020, the Corporate Insolvency and Governance Act (“CIGA”) came into force. CIGA enacts important short-term measures in response to the current pandemic while also implementing major long-term structural reforms to the insolvency regime. Many of the reforms have been effected in the form of amendments to the Insolvency Act 1986 (“IA”).
The resulting changes in court practice and procedure are now reflected in an Amendment to the July 2018 Insolvency Practice Direction, as well as a new Insolvency Practice Direction relating to CIGA.
In this bulletin, Lara Kuehl and Oberon Kwok give an overview of the key reforms.
Should you wish to discuss any of these topics, or raise any other queries, do not hesitate to contact either the clerking team (+44 (0)20 7420 9500 or clerks@selbornechambers.co.uk) or any member of Chambers. Please rest assured that Selborne Chambers remains fully operational and very much open for business.
Mark Warwick QC
Restriction on Winding-Up Petitions
Section 10 and Schedule 10 contain a number of temporary provisions restricting the presentation of debt-based winding-up petitions.
The restrictions provide that:
- No winding-up petitions are to be presented on or after 27 April 2020 if they rely upon statutory demands served between 1 March 2020 and 30 September 2020 – paragraph 1 of Schedule 10.
- No winding-up petitions are to be presented between 27 April 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that: (i) coronavirus has not had a financial effect on the company; or (ii) that the company would have become unable to pay its debts even if coronavirus had not had a financial effect on the company (Paragraphs 2 and 3 of Schedule 10).
- Paragraphs 5 and 6 mirror the provisions in paragraphs 2 and 3 and permit the Court to order the winding-up of a company only if the Court is satisfied that the relevant ground relied upon would have applied even if coronavirus had not had a financial effect on the company.
All of the above provisions are “to be regarded as having come into force on 27 April 2020” (paragraph 1(4), 2(5), 3(5), 5(4) and 6(4) of Schedule 10).
The status of any debt-based winding-up orders that have already been made since 27 April 2020 is:
- If the Court would not have made the winding-up order under paragraph 5 and 6 (i.e., if the Court would not have been satisfied that the relevant ground would have applied even if coronavirus had not had a financial effect on the company), any order made between 27 April 2020 and 24 June 2020 is automatically deemed void (paragraph 7).
- The Court may give directions for the purpose of restoring the company to the position it was in immediately before the petition was presented (paragraph 7(4)).
Any of the relevant periods in CIGA can be shortened or lengthened by up to 6 months (section 41).
Public interest winding-up petitions are unaffected.
Although they are only to apply for a limited period, these restrictions are very wide-reaching and are likely to prevent almost any debt-based winding-up petitions being presented during the relevant period unless the debt(s) relied upon arose long before the Covid-19 crisis. In particular, it is worth noting the requirement that the Court must be satisfied that “coronavirus” (rather than the national lockdown) did not have a financial effect on the company – this is potentially very broad and could include global supply issues or the fall in consumer confidence (both of which probably pre-dated the UK’s first coronavirus case).
New Insolvency Practice Direction relating to CIGA
The new Practice Direction (found here) effects a substantial change of practice in relation to the listing and hearing of winding up petitions. For simplicity, this section focuses on petitions against registered companies.
In relation to any petition presented between 27 April to 30 September 2020 under any of the grounds in IA s.123, the following procedure applies:
Contents of the petition
- The petition will not be accepted for filing unless it contains a statement of the petitioner’s reasonable belief under CIGA Schedule 10 paragraphs 2(2) or 2(4), as required by CIGA Schedule 10 paragraph 19(3).
- The petition must also summarise the grounds relied upon to satisfy CIGA Schedule 10 paragraph 5(2) or 5(3), namely, the restrictions on the ability of the court to make a winding up order.
Non-attendance PTR
- If accepting for filing, the petition is listed for a 15-minute non-attendance PTR, on the first open date after 28 days of presentation.
- A listing certificate must be filed and served at least 2 days before the PTR.
- If the petition is unopposed, and the court is satisfied that it is likely to make a winding up order despite the restrictions in paragraph 5(2) and 5(3), the court can order the petition to be listed in the winding-up list. If so, the usual provisions in the Insolvency Rules regarding advertisement and subsequent steps apply.
- Alternatively, the court may make other directions including listing the matter for a preliminary hearing.
Preliminary hearing
- At a preliminary hearing, the court will determine whether it is likely that, in light of the restrictions in paragraph 5(2) and 5(3), the court will be able to make a winding up order.
- If the court decides that this is not likely to be the case, the petition will be dismissed.
- If the court decides that this is likely to be the case, the petition will be listed in the winding-up list. If so, the usual provisions in the Insolvency Rules regarding advertisement and subsequent steps apply.
- Until a determination in the petitioner’s favour at the preliminary hearing, or the court orders otherwise, the petition remains private (save for service on the company and any other person under IR 7.9).
- In order to rely on evidence at the preliminary hearing, the petitioner must file and serve on the company a witness statement at the same time as the petition. The company may file and serve evidence in response within 14 days of service of the petition.
Suspension of Wrongful Trading
Section 12 of CIGA contains provisions suspending liability for wrongful trading during the “relevant period” from 1 March 2020 and 30 September 2020. The relevant period can be shortened or lengthened by up to 6 months (section 41 of CIGA).
When determining the contribution (if any) that a director should make to a company’s assets (under section 214 or 267ZB of the Insolvency Act 1986), the provisions require the Court to assume that a director (or former director) is not responsible for any worsening of the financial position of the company or its creditors during the relevant period.
It is not clear whether the assumption is intended to be rebuttable (the wording suggests that it probably is not) – we are not aware of any case law on this point yet.
Interestingly, there is no requirement for the worsening of the company’s financial position to have anything to do with the Covid-19 crisis.
These provisions do not apply to certain types of companies, including:
- Those listed in Schedule ZA1 to the Insolvency Act 1986, such as insurance companies, banks, investment banks and investment firms (Section 10(4));
- Parties to capital market arrangements and public-private partnership project companies (Section 10(4));
- Firms carrying on a regulated activity under Part 4A of FSMA which are permitted to hold client money (Section 10(6);
- Building societies, friendly societies and credit unions (Section 10(8)).
Liability for breaches of directors’ duties remains unchanged.
A New ‘Gateway’ Moratorium
A new ‘gateway’ moratorium has been introduced to allow companies to consider and implement rescue options. The old CVA moratorium has been repealed. A new Part A1 and Schedule ZA1 have been inserted into the IA to implement the following.
Effect of moratorium
- There will be a payment holiday for all of the company’s debts incurred pre-moratorium, with the following notable exceptions (IA s. A18):
- The monitor’s remuneration and expenses (see below)
- Goods and services supplied during the moratorium
- Rent in respect of a period during the moratorium
- Wages or salary
- Redundancy payments
- Financial services contracts including bank loans
- The moratorium will carry the usual protections for the company, including the following (IA ss. A20 to A23):
- A restriction on insolvency proceedings against the company, including appointment of an administrator by a qualifying floating charge holder
- A restriction on enforcement and legal proceedings against the company
- While the company is in moratorium, the directors will be subject to certain restrictions, including (IA ss. A25 to A30):
- Limits on the level of payments to a particular creditor
- Restriction on obtaining credit
- Controls on the grant of security and disposition of property, which will be subject to the monitor’s consent (who will need to be satisfied that the action will support the company’s rescue)
The Monitor
- An insolvency practitioner will be appointed as the ‘monitor’ (IA ss. A34 to A41).
- The monitor’s role includes ensuring the company complies with the terms of the moratorium and assessing whether the company is still likely to be rescued.
- The monitor will not be in charge of managing the company.
- A helpful ‘Guide for Monitors’ published by the Insolvency Service can be found here. The Guide addresses important practical matters for insolvency practitioners, such as ethical considerations, bonding requirements and record-keeping.
Procedure
- The moratorium will be triggered by filing the requisite documents at court (IA ss. A3 to A8)
- For electronic filing under PD 51O, the date and time of the filing will be as recorded in the email generated by automatic notification under PD 51O paragraph 5.3(1) (IPD relating to CIGA, paragraph 10).
- The court’s permission will be needed if a winding up petition is pending (IA s. A4). The court can only grant a moratorium if it would achieve a better result for the company’s creditors as a whole, than would be likely if the company were wound up without first having a moratorium.
- The documents to be filed include (IA s. A6):
- A statement from directors that, in their view, the company is, or is likely to become, unable to pay its debts
- A statement from the proposed monitor that it is likely that a moratorium would result in the rescue of the company as a going concern.
- Pursuant to an Amendment to the July 2018 Insolvency Practice Direction (found here), applications for orders relating to a moratorium, under IA Part A1 Chapters 1-6, must be heard before a High Court or ICC Judge, and not before a District Judge Sitting in a District Registry or a District Judge.
Length of moratorium
- The moratorium will last an initial period of 20 business days (IA s. A9).
- The moratorium can be extended in 1 of 4 principal ways (IA ss. A10 to A15):
- (1) Without creditor consent, for an extra 20 business days. This can be done once.
- (2) With creditor consent, for whatever length that the creditors have consented to. This can be done more than once. Consent is obtained via Qualifying Decision Procedure.
- (3) By court order.
- In any of the 3 above cases, the company must have paid all of its moratorium debts (those which were incurred and fell due during the moratorium), as well as any pre-moratorium debts which are not subject to a payment holiday.
- The monitor must certify that it is likely that a moratorium would result in the rescue of the company as a going concern.
- (4) If there are CVA proposals pending, the moratorium is automatically extended for proposals to be dealt with.
Challenge by creditors
- Creditors can apply to the court to challenge the monitor’s or directors’ actions, if they unfairly harm the interests of creditors (IA ss. A42 to A44).
Recent moratorium or insolvency
- The moratorium will not be available to a company that was in a moratorium or formal insolvency process in the previous 12 months (IA Schedule ZA1 paragraph 2)
Termination of Supplies
Another long-term reform is a restriction on the effect of contractual terms which would otherwise allow suppliers to terminate supply to a company in insolvency or moratorium. This bolsters the existing sections 233 and 233A in the IA and is comparable to provisions in the US Bankruptcy Code rendering “ipso facto” clauses void.
- If there is a contractual term allowing a supplier of goods and services to terminate supply or do anything else when the company goes into insolvency or moratorium, that term has no effect (IA s.233B).
- There are two main exceptions to that rule (IA s.233B(5)):
- The officeholder or company consents for supply to terminate, or
- The court allows supply to terminate because of hardship to the supplier
- The supplier cannot make the continuation of supply during the insolvency or moratorium conditional upon payment of its outstanding debts (IA s.233B(7)).
- Small suppliers are temporarily excluded from these provisions until 30 September 2020 (CIGA s.15).
- Certain cases, such as insurance providers and banks, are also excluded (IA Schedule 4ZZA).
- Pursuant to an Amendment to the July 2018 Insolvency Practice Direction (found here), applications for orders concerning the protection of supplies of goods and services must be heard before a High Court or ICC Judge, and not before a District Judge Sitting in a District Registry or a District Judge.
Cross-Class Cram Down
A new restructuring procedure has been introduced, by the insertion of a new Part 26A to the Companies Act 2006 (“CA”), involving the ability to cram down a rescue plan across a company’s dissenting junior classes of creditors.
- The new procedure is available where (CA s.901A):
- The company has encountered, or is likely to encounter, financial difficulties that affect, will or may affect its ability to continue as a going concern, and
- A compromise or arrangement between creditors and/or members is proposed to mitigate those difficulties.
- An application is first filed at court, which includes a proposal for how the classes of creditors and members should be defined. Creditors and members may challenge how classes have been composed at the hearing (CA s.901C(1), (3)).
- If satisfied with the classes, the court will summon votes to be held. However, no meetings will be necessary for any classes of creditors or members who have no genuine economic interest in the company (CA s.901C(4)).
- The voting threshold for each class is 75% in value (CA s.901F(1)).
- After voting takes place, the compromise can be brought back to court for approval (CA s.901F(1), (3)).
- If a class has dissented, the court can override the dissent and ‘cram down’ the arrangement, as long as two conditions are satisfied (CA s.901G):
- The dissenting class would not be any worse off under the arrangement compared to whatever would most likely happen in the alternative, and
- 75% of a class which would receive a payment or have a genuine economic interest in the company in the alternative situation have voted in favour of the compromise.
- If there was a moratorium in the previous 12 weeks before the application to the court, then the arrangement cannot affect the following creditors without their consent (CA s.901H):
- Creditors whose debts arose during moratorium, and
- Creditors who were not subject to the payment holiday during the moratorium.
- Such creditors do not participate in the meetings.
Corporate Governance Reforms
CIGA has introduced measures to take pressure off companies by temporarily easing company filing obligations and providing for greater flexibility in relation to AGMs and other meetings.
The measures relating to meetings can be found in section 37 and Schedule 14 of CIGA and apply to a “qualifying body” (paragraph 1 of Schedule 14), which includes companies, charitable incorporated organisations and registered societies.
CIGA also contains provisions relating to the period to file public accounts and to empower the Secretary of State to introduce regulations extending the periods for certain corporate filings (see sections 38 – 40).
The following measures have been introduced:
Meetings of companies and other bodies
In relation to meetings (including general meetings, meetings of any class of members or meetings of delegates appointed by members) which take place between 26 March 2020 and 30 September 2020 (see paragraph 3 of Schedule 14):
- Such meetings need not be held at any particular place. They may be held electronically without any number of participants being together at the same place. Votes may be permitted to be cast by electronic means or any other means;
- At any such meetings, members will not have the right to: (i) attend the meeting in person; (ii) participate in the meeting other than by voting; or (iii) vote by particular means;
- These provisions apply retrospectively from 26 March 2020, with the effect that any company that has since that date held an AGM in a way that complied with social distancing measures but did not comply with the company’s constitution, has done so in accordance with the law.
Extension of period to hold AGMs
If a qualifying body is under a duty to hold an annual general meeting (including a meeting at which a company’s annual accounts and reports are laid) between 26 March 2020 and 30 September 2020, it may do so at any time until 30 September 2020. This allows qualifying bodies to postpone any annual general meetings until (at the latest) 30 September 2020 (see paragraph 5 of Schedule 14).
Extension of corporate filing periods
Under section 38, public companies are to be given a temporary extension to the period for filing their accounts and reports, where such accounts were required to be filed on a date between 25 March 2020 and 30 September 2020. The period is extended to the earlier of 30 September 2020 or 12 months following the end of the relevant accounting reference period.
Section 39 temporarily empowers the Secretary of State to introduce regulations extending the period during which certain filings must be made at Companies House, including (see section 40):
- The period for filing company accounts;
- The period for filing annual confirmation statements;
- The period for registering a charge;
- The period for notifying a change in directors or registered offices;
- The period for registering changes to a limited partnership.