UK alters insolvency law landscape

UK alters insolvency law landscape

The government has announced a number of changes to insolvency law in an effort to support in-distress businesses

The Corporate Insolvency and Governance Bill was introduced by the government last week to make both permanent and temporary changes to the UK’s insolvency regime. While introduced in response to coronavirus, some changes will have a lasting and notable impact on how insolvency and restructuring will be accomplished in the future.

Permanent changes

 

Restructuring plan

The biggest change to the UK’s insolvency law that was tabled is the introduction of a new restructuring plan. The change will allow for insolvency procedures to be carried out using a ‘cross-class cramdown’. Roger Elford, partner at Charles Russell Speechlys says this change would allow for a procedure similar to that of the already existing company voluntary arrangement (CVA).

“It’s a bit like a CVA, but slightly more sophisticated in that administrators generally put creditors into classes and those classes are based on who they consider as having similar interests. For example, if an arrangement affects landlords all in the same way we’ll put all the landlords in one class.”

Crucially, the introduction of the cross-class cramdown prevents a junior class of creditors from holding out during insolvency proceedings in hopes of a better deal.

“Ultimately the cross-class cramdown is if you have a class of creditors who don’t like the deal they are being offered and they vote against it, the other classes who voted in favour can go to the court. The judge can say ‘this class may not like the deal, but it’s probably as good as they’re going to get. And it’s for the good of this scheme that it gets approved,’” says Elford.

“If other classes vote in favour and a judge’s is happy with the scheme, it can be voted through against wishes of a dissenting class of creditors.”

Elford adds that the law, which is modeled after Chapter 11 of the US Bankruptcy Code, provides a more debtor-friendly process. A direction that many other nations’ insolvency laws are trending towards.

“The UK has traditionally been a very creditor-friendly jurisdiction; creditors have lots of rights to enforce. This was seen as a way to redress the balance slightly more in favour of what is becoming the status quo around the world and giving the board of directors more opportunity to try and rescue their company.”

 

New moratorium period

The bill also introduces a new type of moratorium for struggling businesses. The new moratorium would allow a company to restructure or solicit new investment without creditors taking action against them. The moratorium is set for 20 business days but can be extended to 40 days subject to the approval of the board of directors. It can be further extended to up to a year but requires consent from the company’s creditors.

The moratorium will allow for “debtor-in-possession”, which enables the board to retain control of a company’s assets during restructuring. In comparison to insolvency administrations now, where the board loses control to the administrator.

Elford says: “Under these new proposals, the board will remain in place and will remain in control of the company subject to oversight from the monitor. That monitor must be a licenced insolvency practitioner to someone who would otherwise be administrator or liquidator.”

However, he notes one criticism of the new moratorium, that may still be amended before final reading  which was that the monitor needed to almost guarantee the company could be restructured before proceeding.

“At the moment, if you fall into administration, the administrator can be pretty confident they’re going to get a result for the creditors. They will either rescue the company, or they will sell the assets, sell the business to somebody else. And that will result in value being achieved for creditors.

“Under this new proposal, the monitor has to be satisfied in order to get the moratorium. The company will be capable of being rescued. I think you’ll get a lot of insolvency practitioners who will be very reluctant to make a statement that will essentially say ‘moratorium will equal the rescue of the company’.”

Termination clauses in supply contracts

This change will prevent suppliers for terminating supply contracts will companies who enter into insolvency proceedings.

“If one or other of the parties go into some form of insolvency process or arrangement with creditors, there is usually a provision that the contract comes to an end. This change is basically saying when that happens, it doesn’t”, says Patrick Elliot, Partner at Keystone Law.

He adds that change will only be felt by small businesses as most administrators usually come to an arrangement with suppliers.

 

Temporary changes

 

Suspension of wrongful trading

The suspension of wrongful trading provision was announced back in March by Business Secretary Alok Sharma and would cover the period between March 1 and June 30. The suspension means that company directors or owners would not be penalised for trading beyond a point where they knew insolvency was inevitable.

Elliot says however, that this doesn’t completely absolve a business owner or director from consequences of decisions they make during that period.

“Although the wrongful trading provisions have been suspended for activities during that period, directors have other responsibilities. Potential liability has not been suspended. The fraudulent trading provisions still apply and directors still have their responsibilities in liability under the Companies Act to promote best interest of companies.”

He says these changes while helpful, would not change the decision-making process directors should take if their business is in danger of becoming insolvent.

“This suspension might relieve them of some concern but I would say it was pretty minimal. I don’t think it’s fundamentally altered the obligations of directors and what they should be considering when their businesses are in a distressed situation.”

Statuary demands and winding-up petitions

The bill also introduces a temporary ‘ban’ on coronavirus-related statutory demands made between March 1 and June 30 while also preventing winding up petitions from occurring between April 27 to June 30.

Elliot suggests that the provision would only keep the insolvency rate low in the short term saying, “It just pushes the problem into the future so everything gets shelved until July”.

Elford agrees that this measure may only delay the inevitable adding that: “The longer term implication of this is just that companies who can’t pay debts now are stirring themselves up for problems in the future. If there is no transitional legislation after the end of June, come July, August, there is going to be a lot of companies that owe money and creditors will be able to revert to using statute demands and winding up petitions.”

Company filing requirements

Under normal circumstances, companies and organisations file financial statements and other documents at a fixed date every year and this change allows for more leeway on the deadline.

“The corporate governance changes allow companies that have had problems with for example, holding AGM to retroactively  be allowed to do that and they’ve got an extension of time until the end of September to hold meetings and then similarly, there’s allowance for late filing for Company House forms etc”, Elliot says.

He adds that this temporary change will be quite helpful for organisations whose AGM were cancelled because of the lockdown.

“I imagine there are quite a lot of organisations that are going to be pleased to see this.”

The second reading of the bill in the House of Commons is currently scheduled for June 3.

 

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