The Government has announced major changes to UK insolvency legislation in an effort to further assist businesses as they deal with the effects of what is the biggest challenge to the economy in our lifetime.
Some changes actually had been planned for some time, but other temporary changes have been introduced in order to try and further mitigate the effects of the Covid-19 crisis.
These changes apply to the whole of the UK and specific clauses relating to Northern Ireland legislation have been inserted in this new Bill in order to ensure it has the same legal effect here.
The Bill, which has had to be fast-tracked through parliament without any detailed readings, is expected to come into law soon after the final reading scheduled for 3 June.
This article summarises the changes but is necessarily high level and so readers are encouraged to speak to their contacts at CavanaghKelly if they wish to explore the detail.
- A new free-standing moratorium
This mechanism differs from existing moratoriums in that it is a stand-alone procedure and does not need to be a gateway to any formal insolvency process.
In effect, it will provide a breathing space of 20 business days (this can be extended to 40 business days by the Directors with no creditor approval required) in order to produce a rescue plan. This 40-day period can then be extended for up to 1 year, but only with creditor or court approval. For as long as the moratorium applies, it will prevent the enforcement of security, the commencement of insolvency proceedings or other legal proceedings against a company and forfeiture of a lease.
During the moratorium, the directors remain in control of the business and the process is overseen by a monitor who is a licensed insolvency practitioner.
In most cases, the moratorium can be initiated simply by the filing of the application with the court (no court approval needed).
For the period of the Covid-19 crisis, there are special provisions regarding the monitor’s statement and other notices. During this period the monitor is to disregard any worsening of the company’s financial situation which is attributable to the Covid-19 crisis.
In theory, this moratorium could be a valuable tool for debtors to restructure although in some cases, it may only provide up to 40 day’s further breathing space. In addition, ongoing company liabilities during the moratorium period must be met and thus only companies with sufficient cash (or access to funding) will be able to use the tool.
Finally, the monitor must provide a statement that, in the monitor’s view, it is likely that the moratorium will result in the rescue of the company as a going concern. Therefore, the moratorium will only be open to those companies with a credible and deliverable rescue plan.
- Suspension of termination clauses for suppliers of goods and services
When a company enters an insolvency or restructuring procedure, suppliers can often stop or attempt to stop supplies by virtue of the terms of its supply contract.
This Bill will mean that suppliers (subject to some exclusions) will permanently be prevented from terminating on grounds of insolvency or in relation to breaches of contract which arose prior to the insolvency. They will also be unable to hold the company to ransom on price increases.
A debtor company in this scenario will also not be obliged to pay outstanding amounts for past supplies but must pay for supplies during the insolvency process.
A temporary exemption (available during the Covid-19 period) to this restriction will be available to ‘small’ businesses. This may be of importance to Northern Ireland supplier companies as many of them will qualify as ‘small’ for this purpose and therefore they will be allowed to terminate supply, if they wish to do so.
- A new restructuring plan
This new procedure will closely resemble the existing ‘Scheme of Arrangement’ which is a statutory legal process that allows a company to restructure its debt. It is not an insolvency procedure but must be approved by the Court.
It should be noted at the outset that the restructuring plan will require two court hearings, is likely to be technically complex and as a result of this will be expensive. Thus, it may not turn out to be a practical solution for smaller SMEs in distressed scenarios.
The Principle advantage of the new restructuring plan is that it will offer the ability to cram down one or more classes of dissenting creditors or shareholders. In effect, this means that even if a class of creditor does not vote for the plan, the court may still sanction a cram down provided that certain conditions are met including each creditor receiving more than they would under the next best alternative and the court viewing the plan as fair and equitable.
As part of the restructuring plan, creditors and members will be divided into classes based on the similarity or otherwise of their rights prior to the restructuring plan and following implementation of the plan. The court must approve the class formation and the convening of restructuring plan meetings.
Each class will then vote on whether they accept the plan and provided that sufficient creditors/members approve the plan and the court considers it a proper exercise of its discretion to sanction the plan, then the plan will be binding on all creditors and members regardless of whether they, individually or as a class, approved the plan.
Due to the nature of the process, the courts may need to make some tough judgment calls regarding what is fair under this new legislation.
In addition, it appears this new legislation is more likely to be used in more complex and larger distressed company scenarios, particularly with bond-holder involvement, meaning it is unlikely to be used regularly in Northern Ireland.
These temporary changes only apply during the period of the Covid-19 crisis and initially this period is to be from 01 March 2020 and the period that is 30 days after the Bill comes into force (likely to be June 2020).
- Suspension of the Offence of Wrongful Trading
This will temporarily reduce the threat of personal liability of “wrongful trading” on company directors whilst they are faced with making difficult decisions during the period of this crisis.
The Bill directs the courts to assume that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period.
However, the provision does not provide a blanket clearance from responsibility and crucially does not exempt directors from personal challenge regarding “fraudulent trading”.
- Statutory demands & winding up petitions
Statutory demands and winding-up petitions made during the relevant period will be rendered void unless it can be proved they are not because of the Covid-19 pandemic.
- Annual General Meetings & General Meetings
The Bill temporarily allows those company’s which are under a legal duty to hold an AGM or general meeting to do so by other means even if their constitution would not normally allow it.
These measures apply retrospectively to 26 March 2020 and any companies which have had to postpone AGM’s will be given a limited period in which to hold those AGM’s using the new flexibilities.
- Extension of Filings
The Bill temporarily provides companies with more flexibility around important filing requirements such as the filing of confirmation statements, accounts, changes to the company’s persons of significant control etc. The extended period for the filing must not exceed;
- 42 days in a situation where the existing period is 21 days or fewer
- 12 months in a situation where existing period is 3, 6, or 9 months.
However as these changes have yet to become law, it is important that companies continue to file in line with the current rules until such times as the Bill is enacted to avoid financial penalties, criminal sanctions and the risk of the company being struck off the Register. If a company is struggling to file within the current deadlines due to the impact of Covid-19, the company should apply for the 3 month extension already being offered to companies in the current circumstances.
These measures are welcome and have the potential to help many viable companies who are struggling or will struggle due to the impact of the pandemic.
This article has been compiled by Michael Drumm, Shauna McStravick and Sean Cavanagh and they would be happy to assist with any additional queries.
Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.