The UK Corporate Insolvency and Governance Act 2020 (CIGA) introduced temporary measures to provide companies with the flexibility to continue trading during COVID-19. CIGA also enacted a package of permanent measures to maximise the survival prospects of viable companies.
The reforms implemented through CIGA are the most significant change to the UK’s corporate insolvency regime in 20 years. This article looks at how those reforms have taken shape over the last three years, with reference to the Insolvency Service's Post-Implementation Review of CIGA.
CIGA Post-Implementation Review
On 26 June 2023, the Insolvency Service published its official three-year review of the following permanent measures introduced by CIGA:
- the restructuring plan, which was introduced by CIGA into Part 26A of the Companies Act 2006
- the moratorium procedure, which was introduced by CIGA into Part A1 of the Insolvency Act 1986
- he suspension on contractual provisions terminating or amending the supply of goods or services to companies subject to insolvency proceedings (known as "ipso facto" clauses).
Overall, the Review found that the CIGA measures have been broadly welcomed by stakeholders and are seen as strengthening the insolvency and restructuring regime enabling more companies to be rescued without first being required to enter insolvency proceedings. It was reported, however, that all three tools have been under-utilised when compared against the Government’s expectations. As of 30 June 2023, only 45 moratoria have been obtained and 21 restructuring plans have been registered at Companies House.
The lack of uptake may be largely because practitioners are reluctant to use the tools while they are still in their infancy. There is also a lack of fulsome guidance which would give practitioners comfort while they tread new waters. In any case, the Review considered certain refinements to increase the use of the new processes and promote greater efficiency.
Restructuring plan
The restructuring plan is similar to the established scheme of arrangement, but with the added benefit of the "cross-class cram down": a feature that allows dissenting classes of creditors or members to be bound to a restructuring plan.
While the novel restructuring tool is seen as a success by stakeholders, in practice it has not been used as much as anticipated. Given the often-extensive costs associated with implementing a restructuring plan, some commentators have criticised the tool for being largely unsuitable for the SME market.
To address these issues, the Review suggested possible refinements, including:
- reducing costs of setting up and challenging a restructuring plan: the restructuring plan requires two hearings: one to determine jurisdiction and class composition, and a second to determine whether the plan should ultimately be sanctioned (or, indeed, whether it is appropriate for any other type of order to be made). To reduce the costs and streamline the process, it has been suggested that legislation is amended so that only one hearing is required, or that the first hearing is dealt with on paper. In addition, it may also be more straightforward to remove the ability to appeal against the court's sanction of a restructuring plan, on the basis that an appeal would inevitably lead to exacerbated legal costs. It is worth noting that, in the few cases involving smaller mid-market companies such as Re Houst Limited [2022] EWHC 1941 (Ch ), the courts have taken a pragmatic approach to the level of detail required with a view to keeping costs down
- information asymmetry: professional guidance could assist practitioners in finding the balance on how much information is included in the restructuring plan proposal
- multiple debtor entities: to allow a simpler procedure in group structures, multiple debtor entities could propose restructuring plans without requiring separate applications
- mandatory upside sharing: creditors would receive a share of future profits in a successful rescue, which would, in turn, motivate creditors to become more collaborative on a restructuring plan proposal.
While it was not mentioned, the absence of a moratorium may also explain why the restructuring plan is being used less frequently than anticipated. The introduction of a moratorium during the negotiation and implementation of a restructuring plan could also lead to increased use of the measure.
Moratorium
The moratorium is a "debtor in possession" process. The directors of a company can apply for a moratorium against certain creditor action for a limited period (20 business days in the first instance) in order to give them breathing space to implement a restructuring or rescue of the company. The moratorium period can be extended once without creditor consent for a further 20 business days, then up to a year with creditor consent, and otherwise by court order.
The Review suggested certain amendments to encourage more frequent use of the moratorium, including:
- amending the definition of ‘financial services’ so that it is clear which liabilities are excluded from the payment holiday. It is unclear exactly how the Insolvency Service proposes to restrict that definition, but clarity would be welcomed in any case
- altering the priority of debts to clarify that monitor fees would be paid in a subsequent insolvency, should the moratorium fail to rescue the company. This would likely encourage insolvency practitioners to take on monitor appointments, as currently the position is unclear
- guidance on matters including the role of the monitor, how the initial period of the moratorium can be extended and the possibility of reputational risk for practitioners.
Ultimately, the moratorium is only a short-term remedy and is designed to be used alongside another restructuring or rescue tool. Accordingly, the lack of uptake may also be down to the fact that stakeholders would prefer to focus their efforts on finding a more comprehensive rescue solution. It may therefore be the case that this measure remains largely under-used even if the proposed amendments are effected.
Suspension of ipso facto clauses in supplier contracts
CIGA also implemented extensive restrictions on the ability to rely on contractual termination provisions for contracts relating to the supply of goods and/or services, where the right to terminate arises as a result of a company entering into one of the relevant insolvency procedures. The "relevant insolvency procedures" include administration, liquidation and company voluntary arrangement.
The objective of the provision is to ensure the ability to continue a distressed company's business while it implements an appropriate rescue plan. However, the downside to the provision is that, in practical terms, it is often simply transferring the insolvency risk to suppliers.
In that regard, there are some limited exceptions to the provision, including in circumstances where a supplier can show to a court that continuing to supply the insolvent company will cause it financial hardship. The scope of this exception has yet to be tested in the courts, but it will likely be a challenge to try and successfully rely upon it. In any case, the Review suggests that guidance should be published on how to exercise the measure when dealing with less sophisticated suppliers that are more likely to seek to rely on this hardship exception.
What next?
The measures have been shown to help viable companies to survive and so will be an important aspect of the UK insolvency and restructuring regime going forward. Whilst acknowledging the need for certain refinements, the Insolvency Service, in publishing its Review, has not committed to initiating any specific reforms of the permanent measures. A number of these would require changes to primary legislation and no dates have been set for future consultations.
As more companies experience financial distress due to the difficult environment that currently exists for the UK economy, we are likely to see an increased use of the measures in any event. This will likely lead to further scrutiny from the courts which may, in turn, produce the much-needed guidance to assist practitioners in the effective use of the measures.
Note: this article was first published in Law360.
