UK: Corporate Insolvency and Governance Act 2020 – An overview of the main changes and how companies can use the reforms to their best advantage

By Victoria Hobbs, Joss Hargrave, Jessica Quinlan, Jordan Cooper

07-2020

The Corporate Insolvency and Governance Act 2020 (the "Act") represents big changes to the current insolvency legislative framework and potentially to companies who may be affected by an insolvency within their supply chain. It will introduce new protections for insolvent companies against creditors wishing to exercise termination rights within supply contracts and against more aggressive creditor action.

The Act introduces reforms which are intended to be both temporary (as a response to the global coronavirus pandemic) and permanent. These new provisions will be especially welcomed by those in the Retail & Consumer and Hospitality sectors, as these sectors have been particularly affected by the pandemic.

Permanent reforms

  • Termination clauses in supplier contracts will cease to apply on insolvency.
  • A company will be able to benefit from a moratorium from creditor action without entering into administration.
  • A new restructuring procedure will be introduced.

Temporary reforms

  • Restrictions on the use of statutory demands and winding up petitions.
  • Suspension of liability for wrongful trading.
  • General meetings of companies can be held "by any other means", whether permitted by its articles of association or not.

The main changes brought about by the Act are considered in further detail below.

Key takeaways – For companies seeking to rely on the Act

The greater protections for companies facing insolvency introduced by the Act will no doubt be especially welcome in sectors particularly stricken by the coronavirus pandemic, such as the leisure and hospitality industries.  For companies seeking to rely on any of the measures outlined above, the following considerations may be of practical benefit:

  • Whilst there is a temporary prohibition on the presentation of winding up petitions until 30 September 2020, this provision does not apply if the creditor can demonstrate it has reasonable grounds for believing that i) coronavirus has not had a financial effect on the company, or ii) the grounds on which its winding up petition is made would have arisen even if coronavirus had not had a financial effect on the company.It is therefore prudent to assess the impact of the pandemic, if any, on the insolvent company and to make note of any evidence of their inability to pay their debts prior to the pandemic.
  • If a creditor threatens to present a winding up petition in spite of the coronavirus pandemic having a demonstrable impact on the debtor’s finances, an injunction to restrain the presentation may be obtainable.Travelodge recently successfully applied for such an injunction against the landlords of two of its sites.[1]The court’s judgment was given partly in anticipation of the introduction of the Act and partly on the basis that failing to grant the injunction would harm the interests of the wider creditor group.The Travelodge case contrasts sharply with another recent case with a comparable factual background.[2]In that case, the injunction application failed because it was held that the debtors’ failures to pay were not attributable to the pandemic and pre-dated the outbreak.
  • If looking to take advantage of the new restructuring plan, it is sensible to begin negotiations with creditors as soon as possible as approval requires 75% in value of the creditors in each class.If approval is not obtained, the Court can approve the plan and can bind dissenting creditors. Giving thought to any guarantees and securities that can be offered to creditors may assist in negotiations.

Key Takeaways – for creditors/ suppliers to assist in minimising financial exposure

However the reforms also provide additional obstacles for creditors and/or suppliers in recovering what they are owed.  The following suggestions may assist in minimising both frustration and financial exposure:

  • Companies should keep a close eye on overdue invoices, with a view to taking action before the debtor becomes insolvent in order to avoid any termination clauses becoming ineffective.
  • Ensuring payment terms are as tight as possible will also assist in maintaining cash flow and keeping track of overdue payments.
  • Similarly, keeping a close eye on the terms of agreement may provide other avenues for termination in the case of non-performance that isn’t insolvency-related and therefore embargoed.
  • Lastly, where the debtor is undergoing restructuring, entering into discussions with the directors and/or insolvency practitioners may help to ensure a creditor/supplier’s interests are considered and protected.

Main changes brought about by the Act – the detail

Termination clauses in supplier contracts

Suppliers of goods and services will not be able to exercise insolvency related provisions (also known as "ipso facto" clauses) in their contracts when the other party enters into an insolvency process (including the new processes introduced by the Act itself).

There are certain exceptions to this disapplication of the supplier's rights:

  1. They do not apply to finance-related suppliers or companies (whether they are the insolvent company or the supplier).
  2. Where the insolvency office-holder of the debtor company consents to the termination, the supplier is able to exercise such right.
  3. In cases where continuation of the contract would cause the supplier hardship, the supplier may apply to the Court to seek permission to terminate.

There are already provisions similar to this in relation to critical suppliers in existing legislation but the Act proposes to extend this to all suppliers and is similar to provisions contained in US Chapter 11 proceedings.

There are also temporary exceptions relating to small suppliers.

Moratorium

A distressed company which can realistically be rescued as a going concern, can obtain a 20 business day moratorium from creditor action enabling it to consider viable restructuring options or to seek new investment. The moratorium can be extended by a further 20 business days thereafter but any further extensions will require the consent of the Court or the company's creditors.

This is similar to the moratorium in administration which grants companies protection from creditor action.

Winding up petitions

Winding up petitions presented on or after 27 April 2020 based on a statutory demand served in the period between 1 March 2020 and 30 September 2020 will be prohibited.

Further, and more generally, a winding up petition cannot be presented against a company between 1 March 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that:

  1. Coronavirus has not had a financial effect on the company; or
  2. The debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the company.

These provisions are retrospective from 27 April 2020 and are temporary.

New restructuring procedure

A new restructuring plan similar to existing schemes of arrangement under the Companies Act 2006 is to be introduced. The new plan is modelled on the scheme of arrangement and requires 75% in value of creditors to approve, however, the Court can bind certain dissenting creditors. 

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Last reviewed: 3 July 2020

[1]Travelodge Hotels Limited v Prime Aesthetics Limited, Prime Hotels Limited, Orbital Estates Limited [2020] EWHC 1217 (Ch)

[2]Re Saint Benedict's Land Trust Ltd; Re Shorts Gardens LLP Harper v Camden London Borough Council and another; Shorts Gardens LLP v Camden London Borough Council [2020] All ER (D) 159 (Apr).