COVID-19: The Corporate Insolvency and Governance Bill – key reforms
On 20 May 2020, the Government published the Corporate Insolvency and Governance Bill. The new Bill, if passed in its current form, will enact important short-term measures in response to the current pandemic while also implementing major long-term structural reforms to the insolvency regime.
It has been reported that the Bill is to be fast-tracked through Parliament, and it is scheduled to complete its passage through all remaining stages in the House of Commons by 3 June 2020, after which it is set to be debated in the House of Lords.
In this bulletin, Lara Kuehl and Oberon Kwok give an overview of the key reforms in the Bill in its current form (which is subject to amendment).
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 firstname.lastname@example.org) 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
Clause 8 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 June 2020 (or one month after the Bill comes into force, whichever is the later) – paragraph 1 of Schedule 10.
- No winding-up petitions are to be presented between 27 April 2020 and 30 June 2020 (or one month after the Bill comes into force, whichever is the later) 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) and 3(5) of Schedule 10).
The status of any debt-based winding-up orders that have already been made since 27 April 2020 (or any that might be made before the Bill comes into force) 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 the day before the Bill comes into force will be 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 the Bill can be shortened or lengthened by up to 6 months (clause 39 of the Bill).
Public interest winding-up petitions are unaffected.
Although they will only 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).
It is likely that many creditors will err on the side of caution and not present a petition between now and the end of the relevant period (one month after the Bill comes into force, unless the period is shortened or extended) given the risk of any winding-up order being voided by paragraph 7.
Suspension of Wrongful Trading
Clause 10 of the Bill contains provisions suspending liability for wrongful trading during the “relevant period” from 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, whichever is the later). The relevant period can be shortened or lengthened by up to 6 months (clause 39 of the Bill).
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 it is intended that the assumption will be rebuttable (the wording suggests that it will probably not be rebuttable).
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 will 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 (Clause 10(4));
- Parties to capital market arrangements and public-private partnership project companies (Clause 10(4));
- Firms carrying on a regulated activity under Part 4A of FSMA which are permitted to hold client money (Clause 10(6);
- Building societies, friendly societies and credit unions (clause 10(8)).
Liability for breaches of directors’ duties remains unchanged.
A New ‘Gateway’ Moratorium
A new ‘gateway’ moratorium will be introduced to allow companies to consider and implement rescue options. The CVA moratorium is to be repealed (Schedule 3, paragraph 2). A new ‘Part A1’ and Schedule ZA1 will be inserted into the Insolvency Act 1986 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 (clause 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 (clauses 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 (clauses A25 to A30):
- Limits on the level of payments to a particular creditor
- 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)
- An insolvency practitioner will be appointed as the ‘monitor’ (clauses 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.
- The moratorium will be triggered simply by filing the requisite documents at court (clauses A3 to A8)
- The court’s permission will be needed if a winding up petition is pending (clause 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 (clause 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.
Length of moratorium
- The moratorium will last an initial period of 20 business days (clause A9).
- The moratorium can be extended in 1 of 4 principal ways (clauses 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 (clauses 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 (Schedule ZA1 paragraph 2)
Termination of Supplies
Another proposed 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 Insolvency Act 1986 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 (clause 12).
- There are two main exceptions to that rule:
- 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.
- Small suppliers (as defined by criteria) are temporarily excluded from these provisions. The period of exclusion will be from the entry into force of these provisions, until 30 June 2020 or one month after the coming into force of these provisions, whichever is later (clause 13).
Cross-Class Cram Down
A new restructuring procedure will be introduced, by an insertion of a new ‘Part 26A’ to the Companies Act 2006, involving the ability to cram down a rescue plan across a company’s dissenting junior classes of creditors (Schedule 9 of the Bill).
- The new procedure will be available where (clause 901A):
- A company has encountered, or is likely to encounter, financial difficulties that affect or may affect its ability to continue as a going concern, and
- A compromise or arrangement is proposed to mitigate those difficulties
- A proposal 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 (clause 901C).
- If satisfied with the classes, the court will summon votes to be held. However, no meetings will be necessary for creditors who have no genuine economic interest in the company (clause 901C).
- The voting threshold for each class is 75% in value (clause 901F).
- After voting takes place, the compromise can be brought back to court for approval (clause 901F).
- If a class has dissented, the court can override the dissent and ‘cram down’ the arrangement, as long as two conditions are satisfied (clause 901G):
- The dissenting class would not be any worse off under the arrangement than 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 has 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 (clause 901H):
- Creditors whose debts arose during moratorium, and
- Creditors who were not subject to the payment holiday during the moratorium.
- The above creditors do not participate in the meetings.
Corporate Governance Reforms
The Bill will introduce 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 clause 35 and Schedule 14 of the Bill and apply to a “qualifying body” (paragraph 1 of Schedule 14), which includes companies, charitable incorporated organisations and registered societies.
The Bill 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 clauses 36 – 38).
The following measures are to be 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 are intended to 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, will have 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 clause 36, 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.
Clause 37 temporarily empowers the Secretary of State to introduce regulations extending the period during which certain filings must be made at Companies House, including (see clause 38):
- 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.