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CIGA and the Restructuring Plan – Three Years On

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    Government concludes that the permanent Corporate Insolvency and Governance Act 2020 measures have been "broadly welcomed", although possible refinements identified

    A 'Post-Implementation Review' carried out by the Insolvency Service has concluded that the restructuring plan, the standalone moratorium, and the suspension of contractual termination (ipso facto) measures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) have all been broadly welcomed by stakeholders and are seen as positive additions to the UK's insolvency and restructuring framework.  The review estimates the benefit to UK creditors from increased returns to be nearly half a billion pounds, particularly as a result of the restructuring plan.  See our briefing on the 2022 interim report here.

    CIGA was the most significant change to the UK's corporate insolvency regime in nearly 20 years.  The review was based on independent research carried out by the University of Wolverhampton, as well as a small number of case studies.  Despite finding that the measures had been used less than expected, the review nevertheless proclaims the measures broadly successful, but has identified some areas for possible improvement for all three measures. For the restructuring plan, these possible reforms include measures to encourage greater use of the restructuring plan by SMEs, and ensuring the UK maintains its competitive reputation for restructuring across the EU.  However, the report falls short of making any specific recommendations for reform.  For more detail on the suggestions to be considered for reform, see our table below.

    Overall, the review paints an optimistic picture of the permanent measures introduced by CIGA, particularly the restructuring plan, which we agree is a powerful new tool in the UK's restructuring toolbox.  However, in our view a proper assessment of the suspension of termination clauses provision, and the standalone moratorium may be some way off: to date, there has been insufficient use of these processes to support a conclusion as to their success.  We wait to see if there will be consultation on matters raised in the review, such as reducing costs of restructuring plans (especially for SMEs), the concept of 'mandatory upside sharing', and perhaps express extra-territorial effect for restructuring plans. 

    "With the restructuring plan still in its infancy, further judicial scrutiny is needed for us to understand its full potential. That said, it has already had a real impact since its introduction, and has helped to maintain the UK's competitive restructuring edge."

    Drew Sainsbury, Partner, Restructuring and Special Situations

    Table of possible refinements to address issues raised during the course of the review

    1. Restructuring Plan 

    Key ConclusionComment and Possible Future Reforms
    The restructuring plan is seen as a success and, of the three measures, appears to be the strongest in meeting its policy objectives.
    • Use by SMEs – The cross-class cram down provision is generally seen as an effective addition to the UK’s restructuring toolkit. Although to date it has mostly been used by larger companies, the successful cram down in the Houst case study is a clear example of the use of the measure by an SME. However, some professionals interviewed as part of the review indicated that costs could be a barrier for SMEs, both in connection with proposing a restructuring plan and seeking to challenge one. Notwithstanding this feedback, a previous suggestion in the market of preparing a standardised restructuring plan template has been set aside in favour of no further action being taken, with the recommendation that SMEs should instead look to CVA precedents.
    • Reduction of Costs – Suggestions include deciding the convening hearing on paper (i.e. decided by a judge without a hearing), in particular, for SMEs. Any changes would require consultation and amending primary legislation.
    • One Procedure, Multiple Entities – Another suggestion earmarked for further consideration is whether multiple debtor entities could propose restructuring plans without requiring separate applications. Such a change would introduce a 'lead company' concept with jurisdiction extending to affiliated companies. Any change would require the amendment of primary legislation.
    • Mandatory Upside Sharing – This was a suggestion designed to incentivise creditors (particularly out-of-the-money creditors) to lend their support to restructuring plans. Under the suggestion, creditors would receive a share of future profits in a successful rescue. Again, it would require consultation and amending primary legislation.
    • Information Asymmetry – One aspect highlighted by creditors as part of the review is the need for companies proposing restructuring plans to find a balance between providing too much, and providing enough, information to enable creditors to properly evaluate the restructuring plan proposal. The review suggests that professional guidance (such as expanding the existing Parts 26 and 26A practice statement) could be expanded to improve trust and transparency in the process.
    • Creditor challenge – There is some commentary in the review as to whether there is adequate protection for dissenting creditors. Possible issues include the potentially substantial cost of challenging a restructuring plan and the view that some restructuring plans may be seen as a foregone conclusion (with court approval inevitable). Some participants in the review expressed concern about potential unfairness in the operation of the relevant alternative test, in that it could be seen as inadequate to protect the interests of dissenting creditors. Any reforms to address these types of concern would also require consultation and amending primary legislation.

    2. Suspension of Termination Clauses

    Key ConclusionComment and Possible Future Reforms
    Early signs are positive that the ipso facto provision is meeting its objective, although it is still too early to tell. This measure is intended to support ongoing company rescue by reducing costs. There is also a fairer distribution of available funds to the wider body of creditors, which improves returns to both secured and unsecured creditors.
    • Limited Further Action – Notwithstanding a host of possible refinements having been identified, the majority of these have been paused for the time being, with the Insolvency Service concluding that it is too early to intervene and that the identified issues may resolve themselves over time. Generally, the Insolvency Service acknowledged that continued engagement with the sector is important.
    • Supplier Sophistication and Lack of Supplier Awareness – The area marked for further consideration is in relation to less sophisticated suppliers, where it has been suggested that it might be beneficial for insolvency practitioners to receive guidance.

    3. Standalone Moratorium

    Key ConclusionComment and Possible Future Reforms
    The evidence here is more ambiguous. Whilst evidence shows that there is enhanced company preservation as well as job preservation (where moratoriums have been used successfully in some instances), a number of areas of concern have been identified.
    • Alteration of Priority of Debts – The alteration of priority of debts in a subsequent insolvency procedure can cause uncertainty and may give rise to a subsequent office-holder's fees not being paid. There is evidence that this has led to unwillingness to recommend the standalone moratorium as an option. Any reforms here would require consultation and amending primary legislation.
    • Eligibility Criteria – Although the current eligibility criteria have been formulated so as to mitigate any risk to financial stability, in practice, the eligibility and qualifying criteria may prevent mid-market or large companies from obtaining a moratorium. Any reforms to address the concerns raised that not many companies will be able to meet both the eligibility and qualifying criteria would require consultation and the amendment of primary legislation, as well as a full assessment of the wider impacts on lending.
    • Liability Carve-Outs – Another suggestion is to provide further clarity on which liabilities are within the scope of certain carve-outs from the moratorium (in particular, to the definition of financial services). Any change would require consultation and the amendment of primary legislation.
    • Guidance – A number of areas that would benefit from further guidance have been identified. This includes clarity over the role of the monitor, guidance on how the initial period of the moratorium can be extended, and guidance for insolvency practitioners around use of the process and the possibility of reputational risk.