Corporate Insolvency and Governance Bill: Welcome, but will it promote turnarounds?

Posted: 02 Jun, 2020

The Government recently published its draft Corporate Insolvency and Governance Bill which makes several significant changes to the UK’s corporate and insolvency framework. Its aim is to help companies maximise their chances of survival, protect jobs and support the UK’s economic recovery.

Some of the measures have been anticipated for several years, whereas others have been introduced specifically to help support businesses through the economic impact of Covid-19 and give them “breathing space” to keep them trading while they explore their rescue options.

Once enacted, which is likely to be very soon, the Act incorporates both temporary and permanent measures that offer real prospects for reforming the future of saving businesses, providing they are used for their intended purposes.

Here is a summary of the measures and how they might impact on turnaround and rescue culture:

Changes to the UK insolvency regime

Permanent

•   A moratorium that allows insolvent companies (or those likely to become insolvent) to obtain an initial 20 business days of ‘breathing space’ with scope for extension to pursue a restructuring plan without creditors being able to take legal action, seize assets or enforce debts.
•  The introduction of a restructuring plan that operates like a scheme of arrangement to deal with creditors by class as a category of creditor to cram down debt and/or impose the plan on dissenting creditors providing 75% of the class approve the plan.
•  A change to supplier termination “ipso facto” clauses in supply contracts to ensure continuity of supplies and services during the insolvency and restructuring process.

Temporary

• The suspension of wrongful trading to allow businesses to keep trading without the threat of personal liability for directors. All other directors’ duties remain in force.
• The suspension of creditors’ ability to issue statutory demands and winding-up petitions when a company hasn’t been able to pay its bills due to Covid-19.

Changes to the corporate governance regime

Temporary

• The relaxation of filing requirements and deadlines to account for Covid-19 restrictions.
• The relaxation of regulatory requirements so companies can delay AGMs until late September or hold closed AGMs online.

It is clear that these measures are intended to achieve a significant change to the UK’s corporate and insolvency framework and if used for their intended purpose will have a big impact on turnaround and rescue efforts in the coming months and years. Many of the measures have been welcomed, allowing turnaround and insolvency professionals to focus on the restructure of struggling companies with a view to rescuing them as a going concern rather than as a gateway to liquidation.

Moratorium

Of the three permanent changes to the insolvency regime the new moratorium has prompted much debate between turnaround and insolvency professionals as to how it should and how it is likely to work in practice.

The new moratorium is aimed at saving a company as a going concern by providing time for a viable company to restructure or seek investment. It offers a huge opportunity for turnaround professionals as the Bill introduces the role of “moratorium monitor” which for the moment can only be fulfilled by a Licenced Insolvency Practitioner (IP). The concern about directors remaining in charge of what is deemed a ‘debtor-in-possession’ process can be mitigated by having a cadre of specialists running companies in a moratorium. This provides scope for an alignment of interests between the directors of companies that need the protection of a moratorium, turnaround professionals, and IPs as monitors. Experienced turnaround professionals will have the experience of both running companies and insolvency to assist directors to fulfil their obligations to their monitor and to reassure the monitor that they are getting the information they need to keep track of the turnaround process.

Having a close relationship with IPs who might act as monitor may also be a source of turnaround work and may make it easier to find an IP to accept the role of monitor if they know and trust those running the company. Turnaround professionals are ideally suited to assist directors in preparing the information required before an IP will feel able to make a statement that a moratorium is likely to result in the rescue of the company as a going concern.

Moratoriums might also be used as a gateway to CVAs instead of the implied intention of using restructuring plans. The initial 20 days moratorium and extension of 20 days should provide sufficient time for a CVA proposal to be prepared and sent out to creditors which in turn causes the moratorium to be extended while the CVA proposal is pending. However, the success of CVAs is likely to be impacted by the planned restoration of HMRC’s preferential creditor status, a provision in the Finance Bill, and due to take effect from 1 December 2020. CVAs have traditionally been an option for rescuing companies by allowing them to pay off debts over a manageable period of time but the restoration of Crown preference will make it difficult to get approval for CVAs given the diminished prospects of any meaningful return to unsecured creditors. The success of a moratorium relies on the ability to get consent from creditors through consensual negotiation or the requisite majority approval of restructuring plans and CVAs. For this reason, the prospects for a rescue culture are in serious jeopardy if Crown preference is restored, despite the new Bill.

New Restructuring Tool

The second permanent provision is the introduction of a new restructuring tool which will enable companies in financial difficulty to agree to a restructuring plan. Similar to the scheme of arrangement process in UK and to Chapter 11 in the US, the restructuring plan can be used to cram down across classes of creditors, compromise debt and to impose the plan on dissenting creditors so long as there is a minimum of 75% majority support for the plan from other creditors in the same class.

Unlike a CVA it also has the ability to bind both secured and unsecured creditors and the plan requires court approval, but this will be given providing it does not put dissenting creditors in a worse position than would be the most likely outcome if the plan was rejected. This provides scope for the turnaround industry to develop a new expertise which, to date, has only been used by lawyers familiar with schemes. It would also appear to be a more affordable restructuring tool than schemes although we have yet to see how much it will cost and whether it will be adopted as an alternative to CVAs and schemes.

Change to supplier and service contracts

And the third permanent provision in the Bill is a change to existing supplier and service contracts to prevent suppliers from threatening to withdraw supplies and services in the event of insolvency by claiming a breach of contract. Often, supplies are critical to continuing to trade and to achieving a rescue, and suppliers can hold customers to ransom by using these clauses to extract a premium. Now supplies and services are protected providing payment for ongoing supplies is made during insolvency and restructuring processes. Contracted suppliers have a duty to continue to supply companies despite pre-insolvency arrears, unless they can demonstrate “hardship” as a result. While financial services are excluded, this provision goes much further than existing measures that to date have only preserved continuity of certain key supplies such as utilities.

TMA UK is part of TMA, a global organisation that represents the interests of turnaround professionals as its members who have the skills needed to assist in these unprecedented times. If you need assistance, please contact our helpline on 0844 804 0116