The Corporate Insolvency and Governance Bill – R3 response
20 May 2020
Colin Haig, President of insolvency and restructuring trade body R3, responds to the publication of the Corporate Insolvency and Governance Bill:
"This Bill represents the biggest change to the UK's insolvency and restructuring framework for almost twenty years. Having called for corporate insolvency reforms since 2016, we welcome the introduction of the Bill to Parliament.
"The measures contained in the Bill will support the profession's efforts to help businesses navigate the enormous economic damage caused by the pandemic - this legislation comes not a minute too soon.
"The new tools will add to the options available to insolvency and restructuring professionals trying to rescue businesses, and will enhance the UK's globally recognised insolvency and restructuring framework.
"We are also pleased our feedback on the draft proposals has been taken on board by the Government. Previously, for example, the moratorium would only have been open to solvent businesses, but now the legislation will enable insolvent businesses to obtain a breathing space to review their options, free from the risk that a creditor may push the company into an insolvency procedure prematurely. This greatly increases the number of struggling but potentially viable businesses who could benefit from a vital breathing space, and will help to repair the economic devastation caused by the pandemic.
"We appreciate that in producing this Bill, the Government has condensed a process that usually takes more than year into just a few weeks. The profession will therefore be keen to examine the detail of the legislation, but overall, will welcome this positive step forward."
Corporate Insolvency and Governance Bill – Overview of insolvency measures
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 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. 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
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 that occurs during the relevant period (1 March to 1 June 2020). Whilst 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. Also, 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 certain 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.
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