Major changes to insolvency law kick in

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    Huw Bendon

    Huw Bendon UKBF Newcomer

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    Touted as the biggest change in UK corporate insolvency law in 20 years, the Government’s Corporate Insolvency and Governance Act received royal assent in June 2020.

    It has made quite a splash, with some welcoming the flexibility it gives struggling businesses to restructure, while others are deeply concerned about the risk it puts on creditors – particularly cash-strapped smaller businesses.

    So what’s changed?

    A new 20-day moratorium

    Provided a company is capable of being rescued, a new standalone moratorium is now available to protect it for an initial 20 business days (this can be extended).

    The protection covers typical actions that could be brought against the business, such as the commencement of insolvency or legal proceedings. If you gained a moratorium you are also afforded a payment holiday on some of your outgoings, but not all of them. You still have to pay rent and salaries, for instance, among other costs. So some cashflow is still essential to pay these.

    The moratorium must be supervised by an independent monitor (a licensed insolvency practitioner). They must approve certain actions, and can bring the moratorium to an early end if they judge it will not result in the company being rescued.

    The moratorium is not available to all companies which could be rescued. Some financial institutions are excluded, as are companies which were subject to an insolvency proceeding in the previous 12 months.

    A new restructuring plan

    A new restructuring framework has also been introduced. The key provision of this is to introduce a technical concept called cross-class cram down (CCCD) – something which already exists in some other jurisdictions, such as the US Chapter 11 model.

    Although the UK’s existing procedure is long established and generally works well, it did allow for one class of creditors to block an entire restructure, even when it was in the interests of the struggling company and other creditors.

    Now CCCD allows a court to over-rule such blocking measures, as long as the creditors who were blocking would not be left worse off than in the next most likely outcome of proceedings.

    This new restructuring plan is available to companies which can be wound up under Parts IV and V of the Insolvency Act (1986); and also some overseas companies; charitable incorporated organisations; mutuals, such as co-operatives and community benefit societies; and limited liability partnerships.

    Insolvency termination clauses

    The ability of creditors to cease supply based on insolvency clauses in their contracts, or to hike prices or impose other punishing conditions, has also been removed. This is intended to help administrators restructure a business without being held to ransom by suppliers.

    There are protections for suppliers, too. If you are a supplier, with the company’s consent you can cease supplying. You can also cease if you can convince a court it would cause you hardship (currently undefined, but the threshold may be as high as your becoming insolvent).

    If you do continue supplying, you can still be paid during the new moratorium period. And if the company enters insolvency within 12 weeks you are given a super-priority status for being paid. While this still doesn’t actually guarantee payment, if it appears unlikely that payment would be forthcoming, this is one of the triggers for the monitor to end the moratorium.

    It is also worth noting that you can still rely on termination clauses unrelated to insolvency, such as a standard notice period.

    Temporary pandemic measures

    Given the timing of this new legislation, some additional protections are provided if your business’s woes relate to COVID-19. If you’re trying to keep your business going during the pandemic, you will benefit from a pause on personal liability of directors from wrongful trading. This is effective until 30 September 2020.

    And your company cannot be presented with a winding up petition based on a statutory demand issued between 1 March and 30 June 2020, where COVID-19 is the cause of insolvency. 

    The impact on small and micro-businesses

    While larger companies inevitably grab the headlines - indeed it was reported Richard Branson’s Virgin Atlantic made use of the new scheme in their recent restructuring - this should be on the radar of smaller businesses, too.

    Firstly, if the pandemic has put your business under financial duress, you may be relieved to know that more tools and protections are available for you to orchestrate a recovery.

    Secondly, be aware that if you are a creditor to a business restructuring due to insolvency, your hands may be more tied than they were previously. Particularly with less chance to block a proposed way forward that you do not agree with, and also in being legally obligated to continue supplying the distressed company. One good practice may be to take advice on firming up your non-insolvency-related termination clauses, to give you maximum flexibility should you be caught up with an insolvent business.

    As is common sense when dealing with such complex matters, seek professional advice if you are affected one way or the other.