The Corporate Insolvency and Governance Bill (the Bill), received Royal Assent on 25 June and is now an Act. This signals the single largest change to the corporate governance and insolvency framework in the past two to three decades.
Some of the changes are temporary, designed to give temporary respite to businesses that continue to be battered by the economic damage and uncertainty caused by the COVID-19 pandemic.
Some of the changes are permanent, designed to bring about change to the statutory framework dealing with these areas which has long been mooted but only now hastened into being thanks to the catalyst of the COVID-19 pandemic.
In this article, Tom Hall, Senior Associate in Commercial Litigation & Head of Restructuring and Insolvency at BPE Solicitors, and Pete Frost, Partner in the Insolvency and Recovery team at Hazlewoods, briefly consider the Bill and its implications, both of a temporary and more lasting nature.
The Act runs to a total of 245 PDF pages, encompassing 50 sections (which set out the skeletal provisions) and 14 schedules (which put the proverbial meat on the bone). For the sake of brevity, it is clearly not possible to consider the Act in detail in this article, and as such only a summary of the main changes – both temporary and permanent – is set out below, along with consideration of how the landscape may change from here.
The changes can be summarised as:
- Wrongful trading suspension
- Prohibition on use of statutory demands and winding up petitions
- New free-standing moratorium
- New restructuring process
- Disapplication of contractual provisions in the case of insolvent companies
For our complete summary of what the changes are download our factsheet here.
We see the temporary measures as important tools that sit alongside the Government’s financial support schemes aimed at ensuring businesses are in the best place to trade post-COVID-19.
They provide the necessary breathing space, by preventing creditors taking action at a time when a business has temporarily closed, with a loss of revenue and also support Directors that are having to make difficult decisions during unprecedented times.
The Secretary of State can extend the temporary measures. In our view there may be the need to consider this to support businesses, particularly those that re-start later than others, the leisure industry immediately comes to mind. Without continued support there is the real danger that as soon as measures are lifted there is a ‘dash for cash’ by creditors seeking to take immediate action to recover amounts owed.
The restrictions on actions against Directors, whilst having many advocates, also saw others against the move. What of the Directors of companies that were failing pre-COVID-19 and who have simply used the financial schemes to extend the life of the company? Will the measures allow those Directors to slip through the net of accountability? Given the need for some form of measure, we believe the global approach was the only sensible option in the time available. This gives Directors the necessary support in their efforts to keep companies alive.
The idea of a moratorium outside of the existing insolvency regime is welcome. It fills the gap to afford a viable company, with perhaps short-term solvency issues, protection whilst a longer-term solution is found.
The existing insolvency tools which used in this situation are company voluntary arrangements (CVA) and administration. In the case of administration, a viable business is likely to be sold as part of the process with creditors not benefitting from the longer-term underlying value of the business. A CVA is a well-trodden path and in recent years has been used in many retail and leisure situations to control the position of landlords. It invariably leads to creditors being asked to receive a significant discount on their claims. The moratorium is not seeking this compromise, simply time to allow it to find solutions.
The Monitor plays a key role and places great emphasis on them concluding the company can survive both prior to and during the moratorium. The Monitor has a duty to bring a moratorium to an end if their view changes.
In recent years we have seen auditors of companies being brought to account for their work in failed businesses. What of the Monitor? Their role and responsibilities could be seen as more than that of an auditor and therefore, what level of due diligence will they require when forming their view? Will dissatisfied creditors or Directors look to them for decisions they do not agree with and what actions might be brought against them in the event of the company entering into an insolvency process during, or shortly after, the moratorium period?
We can see the moratorium being a useful tool for larger companies, but for smaller companies the cost implication might mean CVA or administration is the preferred tool.
For more information on how the Act and temporary or permanent measures may affect you business, please contact Thomas Hall, Senior Associate, Litigation and Head of Restructuring & Insolvency at BPE or Pete Frost, Partner at Hazlewoods for more information.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.