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Corporate Insolvency and Governance Act 2021- One year on

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    What a difference a year makes. In June 2020, Covid infection rates were falling and the UK was slowly reopening after the first lockdown, with a sense of relief that, with hindsight, now feels premature. In the restructuring and insolvency world, the Corporate Insolvency and Governance Act 2020 ('CIGA') was concluding its expedited 5½ week passage through Parliament, giving distressed companies breathing space through restrictions on winding-up petitions and two new restructuring procedures to help them work through the challenges ahead. In our June Thought of the Month, we take a look back over the key developments under CIGA one year on.

    But first, how have the new tools introduced by CIGA fared during their first year? The restrictions on winding-up petitions – initially in place to the end of September 2020, but since extended three times to 30 June 2021 (with the possibility of yet further extension at the time of writing) – have arguably had the largest impact. Together with the other government Covid support measures, these restrictions have caused a very significant suppression of normal insolvency levels. The Insolvency Service statistics for Q4 2020 showed that the total number of company insolvencies in 2020 dropped to the lowest annual level since 1989. Perhaps as a consequence, there has not been much need for the new moratorium process, which has barely been used1.

    The restructuring market generally has been quieter than expected during this period, but a handful of companies have so far taken advantage of the new restructuring plan process, establishing a helpful initial body of case law. Further details of what we've learned about restructuring plans are below. We expect the use of the restructuring plan to accelerate over the next year as the economy emerges from lockdown and begins to recover. This will enable corporates to assess the financial impact of the pandemic and analyse their restructuring needs. Much will depend on how the government deals with the upcoming expiry of the restrictions on winding-up petitions, business evictions and Commercial Rent Arrears Recovery ('CRAR'), and an announcement on this is awaited with interest.

    26 June 2020

    CIGA became law and introduced two new restructuring procedures - the restructuring plan under Part 26A of the Companies Act 2006 and a new standalone moratorium procedure under Part A1 of the Insolvency Act 1986 - as well as an ipso facto provision (which prohibits the termination of supply contracts on the grounds of insolvency).

    It also introduced various temporary Covid measures, including restricting the use of winding-up petitions between 27 April 2020 and 30 September 2020 (later extended to 30 June 2021) and suspending personal liability for wrongful training between 1 March 2020 and 30 September 2020 (later revived from 26 November 2020 to 30 June 2021). Read our suite of briefings here.

    As CIGA progressed through Parliament, an amendment was adopted to revive the (recently expired) sunset provision allowing the government to make regulations regarding pre-pack sales to connected parties, which have now been introduced (see 30 April 2021 below).

    14 July 2020

    Virgin Atlantic Airways announced that it had launched the first restructuring plan under Part 26A of the Companies Act 2006 in order to implement a solvent recapitalisation. Ashurst acted on this plan, see our client briefing here.

    The plan was subsequently sanctioned on 2 September 2020. As all four creditor classes voted in favour of the plan, the court applied the 'tried and tested approach' to the exercise of discretion established for schemes of arrangement.

    November 2020

    Pizza Express became the second company to use the new restructuring plan. The sanctioned plan effected a debt-for-equity swap and an old-debt-for-new-debt swap, as part of a wider operational restructuring, which included a CVA to deal with the group's rental liabilities.

    1 December 2020

    The start of December saw the return of Crown preference. For insolvency proceedings opened from 1 December 2020, HMRC now ranks as a secondary preferential creditor ahead of floating charge holders and unsecured creditors for VAT and certain other withholding taxes. See our briefing here.

    Whilst this measure is not technically connected to CIGA, the market had been hoping that this measure would be delayed given the financial impact of Covid and the £33.5bn2 of VAT deferrals agreed as part of the government's Covid support measures. Given the suppressed insolvency rates that we have seen since the start of the pandemic, it's likely that the full economic impact of this measure has not yet been felt.

    30 December 2020

    The 'gategroup' restructuring plan was launched. The timing of this was very significant. As the plan was launched prior to the end of the Brexit transition period (11pm on 31 December 2020), the Lugano Convention still applied to the UK and the court was required to consider whether the Lugano Convention applied to the plan.

    In a clear departure from the case law on schemes of arrangement, the court found that restructuring plans are insolvency proceedings falling outside the scope of the Lugano Convention. This may change how restructuring plans are recognised in some foreign jurisdictions going forward. See our briefing here.

    13 January 2021

    The High Court sanctioned the DeepOcean restructuring plans by exercising its discretion to apply cross-class cram down for the first time. The case is also notable as it established that it is not essential for a restructuring plan to seek to rescue a company as a going concern. See our briefing here.

    March 2021Premier Oil used the restructuring plan as the first example of its use by a listed company. The plan was used by the Scottish group as part of a wider restructuring, culminating in the merger of Premier Oil plc with Chrysador Holdings Ltd, with Premier's shares being readmitted to trading under the new name Harbour Energy plc.
    30 March 2021

    The sixth restructuring plan was sanctioned for Smile Telecoms. Here, a telecoms group operating in Africa used the court's cross-class cram down power to facilitate further super-senior borrowings (as a bridge to an expedited sales strategy), notwithstanding that the senior lender class did not approve the plan by the requisite 75%: only 71% by value voted in favour.

    30 April 2021

    Regulations were made under the government's power (revived by CIGA) to regulate pre-pack sales to connected parties. As a result, for administrations opened on or after 30 April 2021, connected persons buying all or a substantial part of a company's business or assets within the first 8 weeks of the administration will now be required to obtain an independent written opinion on the sale. See our briefing here.

    The regulations followed a report published by the Insolvency Service in October 2020, highlighting continuing concerns about the potential for abuse of the pre-pack process and the need for further creditor protection, particularly if the rush of insolvencies predicted to arise as a result of the Covid pandemic materialises. So far, it has not.

    12 May 2021

    In the first fully opposed cross-class cram down judgment, the Virgin Active restructuring plan was sanctioned. The main take-away from the judgment is that where 'out of the money' creditors vote against a plan or raise objections at sanction, this will carry very little weight. Rather, the key principle is that "it is for the company and the creditors who are in the money to decide, as against a dissenting class that is out of the money, how the value of the business and assets of the company should be divided".

    The use of the plan alone enabled Virgin Active to conclude a financial and operational restructuring, in a way previously done by combining a scheme (or plan) with a CVA. See our briefing here.

    21 May 2021

    The convening hearing for the Hurricane restructuring plan took place. The plan proposes a debt-for-equity swap benefitting the company's bondholders, with the existing shareholders being left with 5% of the equity.

    The company proposed that only the bondholders would vote on the plan, arguing that the shareholders had no right to vote as the dilution of their shares by the plan would not technically affect their rights. The court disagreed, however, and gave the shareholders the right to vote on the plan as a separate class to the bondholders. The sanction hearing is listed for 21 June 2021 and it is expected that sanction of the plan will be strongly opposed by the shareholders.

    28 May 2021

    National Car Parks' restructuring plan, which proposes to compromise leasehold liabilities, had its convening hearing. The sanction hearing is listed for 24 June 2021.

    Looking forward to the next year of CIGA, the key question is whether the restrictions on winding-up petitions, business evictions and CRAR will be lifted, and the government faces some difficult choices here. The jury is out as to whether we will see the perpetually forecast tsunami of insolvencies materialise or whether this will keep on being kicked down the road. Only time will tell.

    1. According to the Insolvency Service Monthly Insolvency Statistics for April 2021, only four companies obtained a moratorium between 26 June 2020 and 30 April 2021.