New tools for directors of financial distressed companies
A focus on the Moratorium and Restructuring Plan introduced by the Corporate Insolvency and Governance Act 2020.
The Corporate Insolvency and Governance Act 2020 (the "Act") received Royal Assent on 25 June 2020, just five weeks after its legislative journey began. The Act introduced both temporary measures to directly respond to the COVID-19 pandemic, as well as permanent measures which brought in wholesale changes to UK insolvency law that had been in the pipeline for some years.
This article focuses on two of the new permanent measures introduced by the Act: the Moratorium and the Restructuring Plan.
The Act introduces a free-standing statutory moratorium which will be available to most companies, while the directors continue to remain in control of the company with the oversight of a Monitor, being a licensed insolvency practitioner. The moratorium is designed to give companies in financial distress breathing space to explore and facilitate rescue and restructuring options, free from creditor action.
The moratorium is available to all companies except 'Excluded Entities' that are, or are likely to become unable to pay their debts, and where it is and remains likely that the moratorium will result in the rescue of the company as a going concern. To be eligible, a company should not have been in a moratorium, administration process, CVA or subject to a winding-up petition in the last 12 months. Overseas companies can also access the moratorium if they have a 'sufficient connection' with the UK. 'Excluded Entities' generally means companies already part of a specialist insolvency regime, for example banks and investment banks, insurance companies and parties to capital management arrangements (where the debt is at least £10m).
The scope of the moratorium is broadly modelled on the moratorium currently available in administration, although with some important differences. The moratorium grants companies a 'payment holiday' from most pre-moratorium debts (including secured and unsecured debts), although there are some notable exceptions to the 'payment holiday', including the need to meet debts or other liabilities which arise under a company's financing arrangements throughout the term of a moratorium.
The moratorium runs for an initial period of 20 business days. The directors can extend this period by a further 20 business days without needing any creditor or court consent (or for longer periods with such consent). For each and every extension, the two qualifying conditions mentioned above still need to be met.
The key appeal of the moratorium for directors of financially distressed companies is that it allows them to retain control of the company. Further, once the moratorium is in effect the company cannot be placed into insolvency proceedings except at the instigation of the directors. However, the moratorium procedure does not offer the same broad and wide reaching moratorium available in administration.
The Act introduces a new Restructuring Plan that is largely based on the existing English law scheme of arrangement available under Part 26 of the Companies Act 2006, albeit with the added ability to allow for cross-class cram-down.
The plan will continue to be available to any company 'liable to be wound up under the Insolvency Act 1986' and applies to the same broad situation where a compromise or arrangement is proposed between a company and its creditors (or members). It may only be proposed by a company that is or is likely to encounter financial difficulties affecting its ability to carry on business as a going concern.
In line with the existing scheme, this is a court process requiring at least two court hearings. The plan must be approved by a 75% majority in value of the class of creditors or members present and voting, although there is no requirement for a majority in number of creditors or members to approve the plan.
The plan can be proposed to one or more classes of creditors or members. Crucially, the plan can be implemented without the consent of each class, through what is called a cross-class cram-down, meaning if a plan proposes to compromise a number of classes, even if the plan was not approved by the required 75% majority of one of those classes, the plan can still be sanctioned by the court and bind that entire dissenting class, if the court is satisfied that:
- if the plan was sanctioned by the court, none of the members of the dissenting class would be any worse off than they would be in the event of the "relevant alternative"; and
- the plan has been agreed by 75% in value of a class who would receive a payment, or have a genuine economic interest in the company, in the event of the 'relevant alternative'.
The 'relevant alternative' is what the court considers would be most likely to occur in relation to the company if the court did not sanction the plan. In practice, it would be for the debtor proposing the plan to articulate the 'relevant alternative'.
Senior Associate, Finance
Baker & McKenzie LLP