On May 20, 2020, the UK government published its highly anticipated Corporate Insolvency and Governance Bill (the ‘Bill’). The Bill aims to provide businesses with increased flexibility and breathing space to continue trading despite the challenges presented by the coronavirus (‘COVID-19’) pandemic. The Bill also introduces new corporate restructuring tools in an effort to maximise distressed companies’ chances of survival.
I. Cross-Class Cram-Down Scheme
The centrepiece of the Bill, touted as a potential game-changer, is a new restructuring procedure (a ‘Cram-Down Scheme’). The Cram-Down Scheme is modelled on the existing scheme of arrangement procedure (an ‘Ordinary Scheme’) and contains certain features of the US Chapter 11 proceedings. It will be available to distressed companies encountering financial difficulties that may affect their ability to carry on business as a going concern, but companies will not need to be insolvent in order to propose a Cram-Down Scheme.
Procedurally, the Cram-Down Scheme will largely mirror that of an Ordinary Scheme, with some innovations. First, there will be no requirement for a majority by number of the scheme creditors voting to approve the scheme. Second, failure of one class of creditors to approve the scheme will not be fatal; this will allow the court to bind classes of dissenting creditors to a restructuring plan (‘cross-class cram-down’), provided they are no worse off under the Cram-Down Scheme than they would have been in what the court considers to be the most likely alternative (likely an insolvency proceeding). Operational creditors may also find their claims will now be brought within the scope of a Cram-Down Scheme and written down as a result.
Importantly, classes that have no ‘genuine economic interest’ in the company may also be excluded from voting. In addition, and by contrast to a company voluntary arrangement, approval of the majority of unconnected creditors by value is not required, and the scheme will have the ability to bind both secured and unsecured creditors.
We expect the Cram-Down Scheme will also be accessible to foreign companies that meet the ‘sufficient connection’ test that applies for an Ordinary Scheme. Companies will still need to consider whether the plan will be recognised and enforceable in other relevant jurisdictions, which will be an important factor in a court’s decision to sanction the scheme.
The scheme will also be available to financial service firms, with certain safeguards including powers for the Financial Conduct Authority and Prudential Regulation Authority to participate in proceedings.
II. Company Moratorium
The Bill also allows directors to apply for a free-standing moratorium for an initial period of 20 business days (which may be extended) if they consider that a company is, or is likely to become, unable to pay its debts when they fall due.
The moratorium will impose (i) payment holidays for debts falling due before or during the moratorium and (ii) a prohibition of winding-up petitions and the enforcement of security interests, both subject to exceptions. To benefit from a moratorium, a qualified insolvency practitioner (a ‘monitor’) must provide a statement attesting that the company is likely to be rescued as a going concern if the moratorium is granted—a relatively high threshold.
Notably, there is no payment holiday for debts arising from financial services, meaning that bank debt and certain other financial obligations of a debtor (‘Financial Debt’) will be excluded. Taking the benefit of a moratorium may also effectively exclude a company from the useful application of the Cram-Down Scheme or an Ordinary Scheme for a 12-week period after conclusion of a moratorium, as in that period certain creditors (including in respect of Financial Debt) cannot be subject to a Cram-Down Scheme or Ordinary Scheme unless they consent to such an arrangement (ie, have they a veto right).
There is also no moratorium for certain financial services firms to ensure that the UK’s existing, bespoke insolvency regimes for financial sector firms remain effective.
Foreign companies may be eligible for the new moratorium if they could be wound up under Part 5 of the Insolvency Act 1986 (the ‘Insolvency Act’), applying existing English jurisprudence. Foreign companies will also need to apply to the courts for a moratorium, whereas UK companies can obtain a moratorium by simply filing with the court.
III. Temporary Suspension of Wrongful Trading Rules
The Bill temporarily suspends provisions conferring personal liabilities on directors for business debts, as set out in the Insolvency Act, with retrospective effect from March 1, 2020 to June 30, 2020. The general directors’ duties regime, other insolvency law offences and director disqualification laws remain in force to deter director misconduct. Notably, the threshold for triggering a director’s common law duties to consider the interests of creditors is arguably lower than the test for wrongful trading (and may be lowered further, depending on the outcome of the appeal to the Supreme Court in BTI v Sequana SA).
IV. Temporary Prohibition of Statutory Demands and Winding-up Petitions
The Bill temporarily prohibits the presentation of winding-up petitions by creditors during the period from April 27, 2020 (retrospectively) until the later of June 30, 2020 or one month following the Bill coming into force, unless the creditor has reasonable grounds for believing that:
- COVID-19 has not had a financial effect on the debtor; or
- the debtor would have been unable to pay its debts even if COVID-19 had not had a financial effect on the debtor.
In practice, this will likely be challenging for the court to determine.
V. Ipso facto clauses
The Bill also prevents suppliers from terminating delivery of supplies on the grounds of the purchasing company’s insolvency (so called ‘ipso facto’ clauses), if the supplies in question continue to be paid for.
The second and third readings of the Bill in the House of Commons took place on June 3, 2020. The Bill now passes to the House of Lords (consideration expected on June 23, 2020) with a notable amendment allowing creditors with aircraft-related interests to participate in a proposed Cram-Down Scheme. For more information, please refer to our full Alert Memorandum.
This post comes to us from David J. Billington (Partner), Polina Lyadnova (Partner), Jim Ho (Partner), Ferdisha Snagg (Associate), Adam Machray (Associate), Philip Herbst (Associate), Bree Morgan-Davies (Practice Development Manager) and Anne Lim (Trainee Solicitor) at Cleary Gottlieb Steen & Hamilton LLP London.