Corporate Insolvency and Governance Act 2020 is now in force

After an expedited 5½ week passage through Parliament, the Corporate Insolvency and Governance Bill (the “CIGA”) gained royal assent on Thursday 25th June and became law on Friday 26th June. The CIGA introduces substantial permanent and temporary changes to the UK's insolvency and restructuring regime designed to help businesses survive the COVID economic crisis.

Giles Boothman, Global Practice Head Restructuring and Special Situations commented:

"We welcome the new tools that the CIGA adds to our restructuring toolkit, in particular the new Restructuring Plan which has the potential for being used creatively to deal with both balance sheet and operational restructurings. And just as we have seen with the development of schemes of arrangements over the last decade we think the Plan will provide a useful tool to secure the UK's position as a leading forum for restructuring processes. Take up might not be immediate, but we are looking forward to using all the restructuring means at our disposal to help clients work through the significant challenges they will face as the UK emerges from lock-down and the economy begins its recovery."

Summary of reforms

Permanent reforms 

Restructuring Plan

The CIGA introduces a new restructuring plan which will provide a company encountering financial difficulties with the ability to propose a compromise or arrangement with its creditors and members to restructure its affairs. The framework of the new restructuring plan is based very much on the scheme of arrangement procedure (which still remains available to companies wishing to restructure). Additionally, the new restructuring plan allows courts to sanction a plan that binds dissenting classes of creditors and members (rather than just minorities within a class) in order to bind out-of-the-money creditors and equity, provided they are no worse off than in the alternative scenario, and the plan is just and equitable. The process of binding dissenting classes in this way is called 'cross-class cram-down'. By using cross-class cram-down, the new restructuring plan is intended to enable a company to compromise its financial and equity structure without having to resort to the use of a pre-pack administration sale in combination with a scheme.

Click here for a more detailed analysis of the restructuring plan.

Moratorium

The moratorium is a new procedure for companies needing a formal breathing space to enable it to pursue a rescue plan. It creates a temporary moratorium during which the company enjoys a payment holiday from some of its pre-moratorium debts, and protection from legal and enforcement action being taken against the company. The moratorium leaves the company's management in control of the company (a so-called 'debtor-in-possession' procedure) but includes the appointment of a licensed insolvency practitioner as monitor to provide some oversight and safeguards for creditors. In particular the monitor is required to assess throughout the moratorium whether rescue of the company as a going concern continues to be likely (although there was, until 30 September 2020, some temporary relaxation of this test to address the acute crisis many companies find themselves in because of Coronavirus³). The moratorium is for an initial 20 business days' period, but is extendable for a further 20 business days by the directors, or for up to one year maximum with creditor consent, or for a longer period if ordered by the court. The Government's hope is that the moratorium will give struggling companies a vital tool to aid survival.

Click here for a more detailed analysis of the moratorium.

Ipso facto (termination) provision

This new provision will restrict the supplier of goods or services to an insolvent company from terminating the contract for supply when the company goes into a range of insolvency procedures. The measure will preserve the insolvent company's supply contracts in order to aid its rescue plan. There are safeguards for suppliers to ensure that continued supplies are paid for, and there is an ability to apply to court to allow termination on grounds of hardship. In addition, temporarily the measure does not apply to small company suppliers. Ipso facto provisions are a feature of a number of regimes, notably Chapter 11 in the US, but other jurisdictions have also adopted them in recent years.

Click here for a more detailed analysis of the ipso facto (termination) provision.

Temporary reforms

Suspension of wrongful trading liability

A directors' potential personal liability for wrongful trading referable to the periods from 1 March to 30 September 2020 and 26 November 2020 to 30 June 2021¹ has been temporarily suspended. Outside of these extraordinary times, the wrongful trading provision is the main deterrent for directors against continuing to trade when there is no reasonable prospect of avoiding insolvency, because trading on beyond this point can result in personal liability. This emergency measure removes the threat of personal liability from directors, with the intention of helping them to continue to trade through the crisis notwithstanding uncertainty over whether the company will be able to avoid insolvency in the future. While the measure provides some welcome relief for directors, they must also factor in that it does not switch off all directors' duties, such as the duty to take into account the interests of creditors where there is a likelihood of insolvency. It can be a difficult balancing act for directors.

Statutory demands and winding-up petitions

The second temporary measure is designed to remove the ability of creditors to threaten to wind-up a company as a method of debt collection. Because of the paralysing effects of a winding-up petition upon a company's business and bank accounts, threatening to wind-up a company is typically a heavy-handed and effective method of forcing payment. However, over-use during the Coronavirus crisis could simply lead to mass insolvencies, which the government wishes to avoid. Therefore this measure temporarily removes the threat of winding-up proceedings and statutory demands where the debt is due to Coronavirus, hopefully providing businesses with an incentive to follow the government's guidance of reaching realistic and fair agreements with creditors. The measure is due to last until 30 June 2021², unless extended.

Amendments to the Bill approved by Parliament

For those who have been tracking the progress of the bill through Parliament, you may be interested to know what amendments were approved during that process. However, with only minimal amendments to the bill between publication and royal assent, the shape of the CIGA remains largely unchanged. The minor amendments of note that were adopted were:

• Extending the temporary measures expiry date to 30 September 2020 (from 30 June 2020), which has already been extended for certain temporary measures (as set out above) and can be extended further if needed;

• Providing the Pensions Regulator and the Board of the Pensions Protection Fund with more information and participation rights in the moratorium and restructuring plan procedures for companies with a defined benefit pension scheme (but not enhanced priority);

• Removing the ability of finance creditors to obtain super-priority for accelerated debt in a subsequent insolvency (following within 12 weeks of the end of the moratorium) where the acceleration has taken place during the moratorium. The finance creditors still enjoy super-priority in respect of other debts falling due to or during the moratorium;

• Trimming the government's so-called Henry VIII powers, which the CIGA grants to the Secretary of State to enable the government to more easily introduce certain future amendments, extensions and improvements where necessary using secondary legislation; and

• Reviving the (recently expired) sunset provision for the government to make regulations regarding pre-pack sales to connected parties. This power was originally taken in the Small Business, Enterprise and Employment Act 2015, following which there was a review of connected party prepack transactions to ascertain whether further regulation was necessary. However, for a number of reasons, including Brexit and then COVID, the report was not published and the sunset power expired in May 2020. This amendment simply revives the power so that reforms to connected party pre-pack administration transactions can be introduced on or before 30 June 2021. Following such revival, on 24 February 2021, The Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 were published in draft form. Subject to approval by both Houses of Parliament, the regulations will come into force on 30 April 2021 and will apply in administrations commencing on or after that date. The regulations will mean that an administrator cannot make a disposal of all or a substantial part of a company's business or assets to a connected person within the first 8 weeks of an administration unless either (a) the creditors have approved the sale as part of the administrator's proposals or (b) the connected person has obtained an independent written opinion before completion of the sale.

For more information please contact your usual Ashurst contact.

1. The original wrongful trading suspension was allowed to elapse on 30 September 2020, but it was revived with effect from 26 November 2020 by The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020, expiring on 30 June 2021 (as per The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) Regulations 2021), which technically leaves a gap between 30 September 2020 and 26 November 2020.
2. Since the publication of this briefing, this date has been extended three times, most recently to 30 June 2021.
3. The temporary relaxation ceased to have effect on 1 October 2020 as per The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Early Termination of Certain Temporary Provisions) Regulations 2020.