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Government proclaims Corporate Insolvency and Governance Act 2020 a success story

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    An interim government report has concluded that the restructuring plan, the standalone moratorium, and the restriction on contractual termination (ipso facto) measures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) satisfy their policy objectives. The report is part of the statutory review which must be carried out within three years of the measures coming into force.

    The report, which was based on a series of structured interviews of insolvency practitioners, lawyers and creditor bodies by insolvency academics, Professors Peter Walton and Dr Lézelle Jacobs of the University of Wolverhampton, and published by the Insolvency Service, proclaims boldly that "the permanent CIGA measures have been broadly welcomed by stakeholders and are seen as satisfying their policy objectives".

    At Ashurst, we welcome the report insofar as it goes, particularly in relation to the restructuring plan, which has made a real impact since its introduction. But we have doubts over whether there has been sufficient practical use of the moratorium and ipso facto measures to found the broad conclusions claimed by the report. The full picture may still be some way off.

    Restructuring Plan

    To date, 12 restructuring plans have been launched,1 including five successful cram-downs (ED&F Man, Smile (2022),2 Virgin Active, Smile (2021) and DeepOcean); one where sanction was refused (Hurricane); and one that was abandoned before the convening stage (NCP). On the face of it, this is a small sample and in judicial terms, it is early days. However, because a restructuring plan involves two court hearings, it has been well tested before the courts, and the number of restructuring plans during the study period aligns more or less with our expectation, so we feel that the market is in a position to gauge how well restructuring plans are working. Restructuring plans also appear to have been more widely used (at least for larger companies) and more extensively tested by the courts than the restructuring regimes introduced by various EU jurisdictions over the last couple of years.

    The report finds that restructuring plans are a success: their development has been facilitated by the court's ability to draw and build upon existing jurisprudence relating to schemes of arrangement (which will aid restructuring plan cases going forward) and the cross-class cram down power has been used effectively in circumstances where, previously, a scheme on its own would not have achieved the same result. It also finds that the restructuring plan has addressed circumstances in which a secured creditor is able to block a company rescue even if the restructuring proposals are well supported, which was one of its primary policy objectives.

    Notwithstanding these accomplishments, the report notes that restructuring plans are expensive, to implement and to challenge (the report estimates the cost to be between £2 million and £10 million). This means that (a) they are considered too costly and time-consuming for the SME market; and (b) dissenting creditors are disincentivised from challenging a restructuring plan, which hinders the policy objective of protecting such creditors. There are also concerns around transparency and disclosure, given that creditors may not always be able to access commercially sensitive information or, if they do have access, they may not have sufficient time to refute company evidence.

    On balance, we agree with the report's assessment of the restructuring plan, including that the cost of implementing a restructuring plan currently dictates that they are primarily the preserve of large and very large companies. This was not the government's intention. The hope was that it would be adopted widely by all sizes of companies and provide a genuine opportunity for SMEs as well as large corporates to restructure and avoid administration or liquidation. That said, the first smaller company restructuring plan (Houst Limited) has recently been launched, and there are initiatives afoot to adapt the restructuring plan for the SME market. While we remain open-minded, we are yet to be persuaded that SMEs will embrace even an adapted version of the restructuring plan in preference to a pre-pack administration in large numbers. This contrasts with the restructuring plan's Dutch counterpart (the WHOA), which so far has proved more popular among Dutch SMEs than large Dutch corporates.

    Moratorium

    There have been only 33 moratorium filings since their introduction two years ago, of which a significant proportion is constituted by the filings for the case of Minor Hotel Group MEA DMCC v Dymant & Anor3 alone. So if you reduce for group filings, the actual number of moratorium cases is very small compared to the government's original expectation of 1,000 and 1,500 moratoria per year. The government's temporary pandemic support measures, which were only fully lifted in March 2022, will undoubtedly be partly responsible for these low numbers because they shielded corporates that were struggling through the pandemic, and suppressed insolvency statistics generally. But it remains to be seen whether the moratorium will now prove more popular, or whether it is, as some have termed it, another 'white elephant' (rather like the small company CVA moratorium, which sat on the statute books from 2002 to 2020 but was barely used).

    Despite the small data sample, the Insolvency Service reports that the moratorium is fit for purpose: it has been successfully used to provide companies with a breathing space to consider a plan for rescue as a going concern, thereby achieving its policy objective of providing greater opportunities for company survival, even in cases where a company has not ultimately been rescued. In contrast to the restructuring plan, the cost of entering into a moratorium is considered to be reasonable.

    However, due to the limitation on eligibility for the moratorium (including that companies party to a capital market arrangement where the company has incurred a debt of at least £10 million are excluded) and certain qualifying criteria (including that the moratorium will likely result in the company's rescue), many large or mid-market companies and larger SMEs are prevented from using the tool and there are concerns that it is only applicable to a unique set of circumstances.

    Concerns have also been raised in relation to the alteration of pre-moratorium creditor priority in a subsequent formal insolvency, and the meaning of "financial services" as it is applied in the distribution of a subsequent procedure. The report notes that this could have various consequences and could lead to surprising results, including a subsequent administrator or liquidator not being paid their fees and expenses, or being paid out after certain unsecured debts which have acquired super priority status by virtue of the moratorium. This may disincentivise insolvency practitioners from advising a company to enter into a moratorium, unless rescue of the company is extremely likely.

    In our view, therefore, it is optimistic to label the moratorium a success at this stage. The moratorium has also only benefitted smaller companies to date, despite the government's intention that the moratorium be used as a tool for companies of all sizes. Nevertheless, despite the lack of use, we consider it is not unhelpful to have this additional tool that might come in handy in certain specific situations.

    Ipso Facto

    Similarly to the restructuring plan and the moratorium, the report finds that the restriction on ipso facto clauses satisfies its policy objectives and is a positive addition to the powers available to insolvency practitioners and companies that have entered into formal insolvency procedures. This is on the basis that the restriction forces communication with suppliers on "day one" and brings certainty to relations with suppliers, thereby saving time and cost.

    However, even more so than with the moratorium, there appears to be a lack of useful evidence on which to base this conclusion, which the report acknowledges. For example, we lack information on (a) how many businesses are being saved due to the restriction on ipso facto clauses; (b) whether there are any associated costs; and (c) how the hardship defence available to a supplier is working.

    To date, there have been just two cases which have cited the ipso facto provision4  and, as the Insolvency Service acknowledges, in neither case was ipso facto a decisive factor. There have been no reported decisions on the hardship defence, for example. The urgency of restructuring cases often dictates that there is neither spare time nor money to argue ipso facto in court, and it is against this backdrop that initial supplies are negotiated. The ipso facto measure might even, in some cases, be driving the behaviour it sought to restrict, by encouraging parties to optimise their position as regards ipso facto when negotiating contracts in origination and/or pre-emptively terminating contracts in the event that the counterparty's insolvency looms.

    In conclusion…

    We agree with the report's assessment of the restructuring plan but not so much of its take on the moratorium and ipso facto measures, on which we think the jury is still out. If the current predictions of recession prove to be correct, there may be ample opportunity to test all three measures against their policy objectives in the months to come.

    Authors: Inga West (Counsel); and Charlotte Harvey (Associate).

     

    1 Re Virgin Atlantic Airways Limited [2020] EWHC 2376 (Ch); Re PizzaExpress Financing 2 plc [2020] EWHC 2873 (Ch); Re DeepOcean 1 UK Limited [2021] EWHC 138 (Ch); Re Gategroup Guarantee Ltd [2021] EWHC 775 (Ch); Re Smile Telecoms Holdings Limited [2021] EWHC 933 (Ch); Re Virgin Active Holdings Ltd and other companies [2021] EWHC 1246 (Ch); Re Hurricane Energy plc [2021] EWHC 1759 (Ch); Re National Car Parks Limited [2021] EWHC 1653 (Ch); Re Amicus Finance plc (in administration) [2021] EWHC 2255 (Ch); Re Smile Telecoms Holdings Ltd [2022] EWHC 740 (Ch); ED&F Man Holdings Limited [2022] EWHC 687 (Ch); Houst Limited (convening judgment pending)

    2 Whilst Smile's second restructuring plan (sanctioned on 30 March 2022) did not utilise the court's cross-class cram down power under section 901G of the Companies Act 2006 (CA 2006), it disenfranchised members and creditors by excluding certain classes from voting under section 901C(4) of the CA 2006.

    3 Minor Hotel Group MEA DMCC v Dymant & Anor [2022] EWHC 340 (Ch)

    4 Re Gategroup Guarantee Ltd [2021] EWHC 304 (Ch); P&O Cruises International Ltd v Demise Charterers of the Columbus [2021] EWHC 113 (Admlty)

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.
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