Corporate Insolvency and Governance Bill published
Earlier today, the Government published its Corporate Insolvency and Governance Bill which, once it has been made law, will introduce the biggest reforms to the UK’s insolvency framework for almost twenty years, as well as a series of temporary changes to the corporate governance requirements for companies and other entities.
The Bill, which has now been laid in parliament ahead of being formally debated in the coming weeks, can be viewed by using the links at the bottom of the page.
A welcome, and important, step forward
R3 has been calling for corporate insolvency framework reforms since 2016 and so we’re pleased that, despite the circumstances, these changes are now almost a reality.
We hope that the measures contained in the Bill will support the profession’s efforts to help businesses navigate the enormous economic damage caused by the pandemic. It’s safe to say that this legislation comes not a minute too soon.
While many of you will already be aware of the measures included in the Bill, please see below for a summary.
Over the last few weeks, R3 has been providing the Insolvency Service with technical input and views from members as they have worked to complete this piece of emergency legislation.
We have welcomed this positive approach and we are pleased that some of our feedback has been taken on board. One key example is the moratorium: under the Government’s previous plans, in order to enter a moratorium, a business would have had to be solvent – which would obviously exclude the huge number of insolvent businesses that will need to be helped through this crisis. Another example is the fact that prior to our feedback, any professional could have taken the role of a moratorium monitor. Thankfully, following our feedback, both policies have changed: the moratorium is open to solvent and insolvent companies, and the monitor must be an insolvency practitioner.
That said, we appreciate that in producing this Bill, the Government has condensed a process that usually takes more than year into just a few weeks. This does make the job of reviewing the legislation even more important - we know that the Insolvency Service is keen to hear about any drafting issues, so please do let us know if you spot anything. It goes without saying that these new tools need to work, so your feedback is crucial.
As mentioned, the Bill has only been introduced to Parliament – it has not yet become law. We understand that the Government wishes to get this legislation on to the statute book as soon as possible, meaning that these tools may be available from the start of July, subject to a straight-forward journey through Parliament.
Over the coming weeks, as well as raising any drafting issues with officials, we’ll be providing members with guidance and briefing materials which will set out all of the practical points you will need to be aware of, so that getting to grips with the legislation, and the tools it places at your disposal, is that bit easier.
The Bill includes eight measures, introduced to help businesses manage the economic damage resulting from the COVID-19 pandemic. These measures are:
The moratorium will give struggling businesses 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. 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 closely resemble the existing English ‘Scheme of Arrangement’. The measure will allow struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue option for companies that are suffering financially. 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.
Annual General Meetings (AGMs) and general meetings (GMs)
The Bill temporarily allows those companies that are under a legal duty to hold an AGM or GM to hold a meeting by other means – even if their constitution would not normally allow it. As a result, directors will not be exposed to liability for measures that need shareholder endorsement, and shareholders’ rights are preserved.
The measures relating to company meetings are intended to be retrospective from 26 March so that any company that has already had to hold an AGM in a way that adhered to social distancing measures, but that as a result did not meet relevant obligations in its constitution, will have done so in accordance with the law. Companies forced to postpone AGMs which were due to be held after 26 March will be given a limited period after the Bill is passed to hold those AGMs using the new flexibilities.
The measures will not prevent shareholders from exercising their right to vote on resolutions or other matters brought before the meeting, though they may be prevented from voting in person (rather than by post or by electronic means).
Extensions of filings
The Bill enables the Secretary of State to make regulations to extend deadlines for three types of filing: accounts; confirmation statements (including event-driven filings that are required to be submitted in advance of the confirmation statement) and registrations of charges.
This measure is intended to reduce pressure on companies that are currently unable to meet their filing deadlines as a result of COVID-19 related disruption.
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.
R3 members can provide advice on a range of business and personal finance issues. To find an R3 member who can help you, click below.