According to the Eastern branch of the insolvency and restructuring trade body R3, this week’s [20/5/20] presentation to Parliament of the Corporate Insolvency and Governance Bill is a huge step forward in navigating the enormous economic damage caused by COVID-19.
R3 Eastern Chair Alistair Bacon of AMB Law in Ipswich, said: “The measures contained in the Bill come not a minute too soon and will add to the options available to insolvency and restructuring professionals trying to rescue businesses.”
The new Bill, which is set to be expedited through the Parliamentary approval process, could become law as early as June. It introduces a moratorium which will give struggling companies a 20-business day opportunity to consider a rescue plan, extendable to 40 business days, with further extensions at the agreement of creditors or the court.
Further proposed measures include temporary changes to wrongful trading provisions, which will enable businesses to continue to operate without the threat of personal liability to directors. Written warnings from creditors and winding up petitions against companies struggling financially due to the coronavirus could also be suspended.
Alistair Bacon continued: “The proposed legislation will give both solvent and insolvent businesses crucial breathing space and increased legislative flexibility to review options without being pushed prematurely into an insolvency procedure. This new approach could make a significant contribution to repairing the economic devastation caused by the current pandemic.”
He added: “R3 appreciates that in producing this Bill, the Government has condensed a process which usually takes more than a year into just a few weeks. The insolvency and restructuring profession will therefore be keen to examine the detail of the legislation but, overall, we welcome this positive step forward.
Here is Overview of Insolvency Measures for the Corporate Insolvency and Governance Bill
The moratorium will give struggling businesses a 20-business day opportunity to consider a rescue plan, extendable by the directors for a further 20 business days or with creditor consent up to a year. The company will remain under the control of its directors during the moratorium, and no legal action can be taken against a company during this period without leave of the court. The process will be overseen by a monitor who must be a licenced insolvency practitioner.
The new Restructuring Plan will allow struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue. The plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.
It will introduce a cross-class cramdown that will allow dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.
Termination clauses (essential supplies)
The Bill also introduces a permanent change to the use of termination clauses in supply contracts. As a result of the measure, where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or to vary the contract terms with the company (for example, increasing the price of supplies). The customer is required to pay for any supplies made once it is in the insolvency process but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.
The measure also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the emergency.
This Bill introduces temporary provisions to void statutory demands made between 1 March 2020 and 30 June 2020. The Bill will also restrict winding up petitions from 27 April 2020 to 30 June 2020. These temporary measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of COVID-19.
Suspension of Wrongful Trading
The Bill will temporarily relax the threat of personal liability for wrongful trading from company directors while they make their best efforts to continue to trade during the period associated with the initial period of the COVID-19 pandemic. However, the provisions in the Bill do not provide a blanket suspension of the wrongful trading provisions.
When determining the liability of the director (the contribution – if any – to a company’s assets), the court is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors which occurs during the relevant period (1 March 2020 to 1 June 2020). While directors may not be liable to contribute to the losses in this period, losses incurred in the periods before and after COVID-19 still remain a factor. Directors may still be subject to action for other breaches of duties during the COVID-19 period.
A note on financial services firms
Certain financial services firms and contracts have been excluded from some of the reforms. The financial services regulators have existing powers to intervene in the business of financial services firms in distress, and there are a number of existing special insolvency regimes for some of these firms.
The Bill’s exclusions for financial services will ensure that these existing special insolvency regimes are unaffected, and that financial market participants have the legal certainty needed to facilitate the efficient functioning of financial markets.
The company moratorium will not be available to certain financial services firms and will not affect certain financial contracts. The new termination clauses measures will also not apply to financial contracts or to financial services firms. This is to ensure legal certainty and support the efficient functioning of financial markets. The suspension of wrongful trading will also not apply to certain financial services firms.
Financial services firms will, however, have access to the new Restructuring Plan, though with appropriate safeguards, including a role for the financial services regulators.
There are no exclusions for financial services firms for the other measures provided in the Bill.
- R3 is the trade association for the UK’s insolvency, restructuring, advisory, and turnaround professionals. We represent insolvency practitioners, lawyers, turnaround and restructuring experts, students, and others in the profession. Our members are qualified, regulated and work across the spectrum of the profession, from the global legal and accountancy firms through to smaller, local practices.
- R3 comments on a wide variety of personal and corporate insolvency issues. See www.r3.org.uk for further information.
- R3 stands for ‘Rescue, Recovery, and Renewal’ and is also known as the Association of Business Recovery Professionals.