New Additions to the Restructuring Toolkit

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If there’s been one benefit to the COVID-19 situation, it’s that it has focused the Government’s attention on the tools available to insolvency practitioners in the UK. The UK’s insolvency regime is heralded as one of the best in the world, however, it could be argued that the focus on our insolvency regime is very much ‘creditor-led’, whereas some of the new additions brought in by the Corporate Insolvency and Governance Act 2020 (“CIGA”) are more ‘debtor-led’.

What are the new additions?

The two major changes as a consequence of the CIGA are the extension of the moratorium to companies and the introduction of the restructuring plan process, both of which are company-led and are focused on providing opportunities for companies to facilitate a rescue. Both measures had existed in some form prior to the CIGA, with the moratorium being a key advantage of the Administration procedure, whereas the restructuring plan heavily resembles the Scheme of Arrangement process.

The Moratorium

The moratorium seeks to provide the company with protection from its creditors – whilst the moratorium is in place, a creditor is unable to instigate or continue with legal action or enforcement. Under the CIGA, a company can apply for a moratorium and it will initially last for 20 business days, although it can be extended to 40 business days without additional consent. If required, it can be extended to a maximum period of 12 months, with the consent of creditors, or longer with an order of the Court.

The key difference with the moratorium as a standalone process is that its aim is to provide breathing space for the company whilst it facilitates a turnaround strategy that will affect the rescue of the company rather than the business. This means that the focus is on the company being capable of being rescued as a going concern rather than a focus on saving the business, for example by selling it to a third party.

The moratorium process is overseen by a Monitor, who is a licensed insolvency practitioner. The Monitor can only take the appointment if they believe that the company is capable of being rescued. If this is not the case, then a formal insolvency process is likely to be more appropriate.

Whilst the moratorium is in place, the company must pay certain of its debts as and when they fall due, including, but not limited to, wages and salaries, financial obligations - such as loan repayments - and new supplies. In the event that the plan does not succeed and the company enters into an insolvency process within 12 weeks of the end of the moratorium, the debts that remain unpaid from the moratorium period will have priority in the subsequent insolvency process.

The Restructuring Plan

This is modelled on the Scheme of Arrangement with the addition of cross-class cram-down for dissenting creditors. The Scheme of Arrangement requires the approval of more than 75% of each class of creditor, meaning that there is the opportunity for one particular class to block the restructure. The introduction of the cross-class cram-down is meant to assist with the restructure, so that as long as those creditors dissenting are not treated unfairly by the proposed restructuring plan, the Court can sanction the implementation without the approval of those dissenting creditors. This gives the company an opportunity to compromise its debts with the hope that it can then continue with the restructure. Where there is creditor pressure, the restructuring plan can be run in conjunction with the moratorium.

What else has been introduced by the new Act?

The CIGA has also introduced a restriction on suppliers which stops them from terminating agreements for supplies or services with a customer who has entered a restructuring or insolvency process. In addition, the supplier is no longer able to demand payment for the outstanding supplies before they supply the company in the relevant process (known as a ransom payment) unless they can demonstrate, to the Court’s satisfaction, that in so doing it will cause them financial hardship. It should be noted that suppliers who are classed as small companies (as defined by the Companies Act) are exempt from this until 30 September 2020.

Temporary Suspensions

Winding up petitions cannot be presented from 27 April 2020 until 30 September 2020 unless the creditor can demonstrate that the non-payment of debt was not due to the financial hardship suffered by the pandemic, and statutory demands served between 1 March 2020 and 30 September 2020 can also not be used to present a winding up petition on or after 27 April 2020.

In addition to the above, the wrongful trading provisions are suspended until 30 September 2020 although the fraudulent trading provisions and directors’ duties generally continue to apply.

In summary

The new additions bring a new dimension to the rescue culture, by providing focus on the debtor and moving away from the more traditional asset realisation models. The moratorium will bring much needed breathing space to businesses that have been materially affected by a one-off event however whether it will be as successful as some have suggested remains to be seen, especially given that the company will have to demonstrate that it is viable. Either way, the changes do reiterate the importance of seeking advice as soon as you spot difficulties on the horizon, as the earlier the company can speak to its advisers, the more options there will be available to it.

For futher information on Moratorium click here and for further details on Restructuring Plans click here