On 28 March 2020, the Secretary of State for Business, Energy and Industrial Strategy (BEIS) announced key measures to protect companies and businesses facing major funding and operational difficulties in the current COVID-19 pandemic. The measures will involve the Government bringing forward legislation at the earliest opportunity to amend current U.K. insolvency law to give firms extra time and space to weather the current storm while ensuring that creditors can get the best return possible in the circumstances. These measures will likely have a significant impact on the position of creditors and their existing rights to seek repayment of overdue indebtedness, etc.
The Government also intends to put measures in place to assist companies with the holding (or postponing) of AGMs while the current restrictions on public gatherings remain in place.
The legislation will be introduced to implement these measures at the earliest opportunity. Until then, there is bound to be a degree of speculation as to what exactly the changes will involve.
The Insolvency Measures as Announced
The Government has so far provided very little detail in its announcement about these new measures, beyond saying that:
- they are intended to help U.K. companies undergoing a financial rescue or restructuring process to keep trading and avoid insolvency
- they will enable companies to continue to get hold of supplies, such as energy or broadband and raw materials while attempting a rescue
- there will be a temporary suspension of the U.K.’s wrongful trading provisions under which directors can face liability if they allow their companies to continue to trade at a time when there was no reasonable prospect that the company would avoid going into insolvent liquidation. This suspension will be backdated to 1 March 2020
- all other checks and balances to ensure that directors fulfill their duties properly will remain in force.
The Government has also said that the new legislation to introduce these measures will implement the plans that were announced in August 2018 to introduce certain new insolvency restructuring procedures (the “2018 Insolvency Proposals.”)
What Will the New Measures Involve?
The Government announcement follows various discussions that have been ongoing between business bodies, professional advisers, others and the Government about the sorts of protections and help in the area of insolvency law that are most urgently needed by U.K. businesses. As part of these, last week the Insolvency Committee of the City of London Law Society (the “CLLS”) produced some specific proposals of its own but it is not clear to what extent (beyond the temporary suspension of wrongful trading) these will provide the basis for the new measures just announced. In case these become relevant, however, a summary of the CLLS proposals is provided in the Annex to this briefing.
In addition, the Government will have been aware of the measures that several other jurisdictions, including Australia, Germany and Spain for example, have already announced or introduced, providing for the temporary suspension of, or restrictions on, creditor led insolvency proceedings as well as for suspension of wrongful trading type liability.
A New Short Moratorium to Give Companies a Temporary Breathing Space in Which to Restructure
A new moratorium is to be introduced to protect companies while they explore options for a financial rescue or restructuring. This will be in addition to the existing moratoria provided by the Insolvency Act 1986 (the “Act”) to companies that either enter into administration or, albeit only for a ten-day period, file notice of their intention to appoint an administrator. We will have to wait for the publication of draft legislation to see to what extent this new COVID-19 moratorium will differ from, or build on, the new moratorium detailed in the 2018 Insolvency Proposals (summarised below).
Suspension of Wrongful Trading Liability Under the Insolvency Act
Section 214 of the Act allows a liquidator or administrator to apply to the court for an order requiring a director to make a financial contribution to the assets of the company where a company has gone into insolvent liquidation and before the winding up the director knew or ought to have known that there was no reasonable prospect that the company would avoid entering into insolvency.
The Government has announced that these provisions will be suspended, retrospectively from 1 March 2020. Despite this suspension, directors will remain subject to several other potential sources of liability (including criminal liability) under the Act, including, for example, personal liability in respect of fraudulent trading.
The Government’s 2018 Insolvency Proposals
The insolvency reforms that the Government announced in August 2018 (and has now said it intends to introduce with its new COVID-19 measures) were set out (though without any draft legislation) in Section 5 of an Insolvency and Corporate Governance—Government response document. These proposals followed on from its 2016 consultation on reforms to the U.K. corporate insolvency regime and included:
- a new moratorium that would be available for solvent companies that would otherwise risk becoming insolvent
- prohibitions on suppliers exercising termination rights under their supply agreements (but with the ability for a supplier facing undue financial hardship to apply to the court for permission to terminate its supply)
- a new restructuring plan, operating in a similar way to the existing creditor scheme of arrangement process but allowing the “cross-class cram down” of dissenting creditors.
The 2018 Moratorium Proposal
The new moratorium announced in August 2018, would include these features:
- the moratorium would be triggered by a court filing and have an initial 28-day life, capable of being extended by another 28 days (any extension beyond 56 days would require the approval of both a majority (in value) of secured and unsecured creditors, or the court, to the extent creditor approval is impracticable)
- but only if the moratorium’s key qualifying conditions of the company remaining solvent, being capable of rescue, the test being that rescue is more likely than not” and being able to pay its on-going liabilities, continue to be satisfied
- the appointment of a “monitor” to help protect the integrity of the moratorium process and creditor interests
- the company’s directors would remain in control of the company’s operations
- expenses incurred during the life of the moratorium would be treated like administration expenses and have “super-priority” over any subsequent liquidation or administration expenses
- it could be brought to an end at any time where:
- the monitor concludes that the company no longer satisfies the above qualifying conditions, or
- creditors apply to the court to challenge the moratorium on the basis of the above key qualifying conditions not being satisfied or that the moratorium is unfairly prejudical to creditors.
The 2018 Cross-Class Cram Down Restructuring Plan
This new restructuring plan would operate independently of any use that might be made of the above moratorium facility and involve a two-stage court process similar to the existing process for schemes of arrangement under the Companies Act 2006. This does not seem to fall into the class of “emergency help” that companies currently need and may seem to be a surprising and likely complex initiative to be prioritising at this time. However, it may be that the Government wants to provide some certainty now about the future options that may be available to companies once they have the protection of the short-term moratoria which is to be put in place and can start to plan for a restructuring that will assist them in the months and years ahead once the present crisis has abated.
The key features of this new restructuring plan are:
- it would stand alongside the existing scheme of arrangement process
- be available to both solvent and insolvent companies
- only the debtor company could instigate the plan process but creditors and shareholders may apply to the court for a counter-proposal to be put to creditors and shareholders
- the court would have a dual role in both:
- settling the class meetings to be held to approve the plan (as with schemes of arrangement, class composition would be based on rights and interests, and may be subject to challenge), and
- if approved, exercising its discretion (as with schemes of arrangement) to approve the plan and make it binding on all creditors and shareholders
- the approval threshold, subject importantly to the unique “cross-class cram down” feature of the plan, would be 75% in value of creditors voting and instead of the existing scheme of arrangement additional requirement for a simple majority in number, there would be a requirement for a majority of unconnected creditors to support the plan
- cross-class cram down:
- unlike the position for existing schemes of arrangement, the court may approve the plan even where one class of creditors affected by it does not support the plan
- but as protection to a dissenting class of crammed down creditors, they must be paid in full before any junior class receives any distribution (the so-called Absolute Priority Rule (“APR”) under the U.S. Chapter 11 process)
- however, unlike U.S. Chapter 11 proceedings, the court could still approve a plan, despite non-compliance with the APR, where:
- that is necessary to achieve the aims of the restructuring,
- non-compliance is just and equitable in the circumstances, and
- at least one class of impaired creditors who will not be paid in full under the plan has voted in favour of the plan.
Impact on Creditors
The Government has said that it will attempt to strike a balance when introducing these COVID-19 insolvency changes between protecting companies from short-term liquidity challenges and ensuring that creditors get the best return possible in those circumstances. Perhaps inevitably, that balance is likely to favour debtor companies more than creditors and that is bound to be of concern to creditors whose businesses may also be threatened with COVID-19 related liquidity and operational pressures, particularly as a consequence of their debtors seeking relief under these new moratoria provisions.
Once details of the Government’s new measures are available, we will have to see to what extent creditors’ existing rights to apply to the court for the appointment of an administrator or to present a winding-up petition (perhaps subject to the court being satisfied that there is no realistic prospect of a company avoiding insolvency) remain available.
A major problem for public and listed companies facing holding their AGMs in the next few months is how they will manage to do that while the COVID-19 restrictions on movement and gatherings remain in place. Although these companies have been granted recent concessions:
- by Companies House, to apply for a three-month extension in the deadline for filing their accounts,
- by the FCA, for listed companies, an extra two months by which to publish their annual financial report, and
- for companies traded on AIM, an extra three months by which to publish their annual financial report,
none of these concessions relieve those companies from the requirement under section 336 of the Companies Act 2006 to hold an AGM within six months of the end of their financial year.
A number of concerns have been expressed about how this AGM problem could best be resolved for companies, all of which, hopefully, will now be removed and addressed by the following measures that the Government has announced it will legislate for, so as to enable AGMs:
- to be postponed beyond the current six-month deadline for public companies, or
- to be held “virtually” (i.e. online in some way) with only proxy or electronic voting.
These concerns ranged from possible legal issues surrounding holding totally “virtual” meetings, as opposed to “hybrid” meetings where some form of physical meeting still takes place and whether a company’s articles would permit this, to investor concern about wholly virtual meetings. Also, whether companies might be forced to hold their AGMs before their accounts would be available to be laid before the AGM and the impact that might have on the authorities (with regards to share allotment, disapplication of pre-emption rights, share buybacks and director re-election) which companies typically ask shareholders to renew on an annual basis at their AGMs.
Finally, on 27 March 2020 ICSA | The Chartered Governance Institute, with the help of various other organisations and firms, published Q&A guidance for companies on holding AGMs while the current restrictions on public gatherings remain in force. This supplements earlier guidance published on 17 March 2020 and will be of help to any company planning to hold a meeting during the current environment, before the Government's new AGM measures are introduced.
Summary of certain of the CLLS “Proposals for Mitigating the Short Term Effects on Viable Businesses of COVID-19”
Restrictions on Creditor Winding-Up Petitions
Directors may, temporarily, be permitted to file a special “COVID-19 Declaration” (a “Declaration”) stating that the company is facing liquidity or operational challenges as a result of circumstances related to COVID-19. The effect of this would be:
- creditors could not thereafter file winding-up petitions against the company for the next 90 days (a moratorium or grace period that might be extendable under the new measures by a further 90 days which would align the period with the 180 day automatic stay period under the U.S. Chapter 11 process)
- if not already filed, a Declaration could also be filed by a director within two business days of a winding-up petition being presented; this would operate to invalidate the petition and so prevent the restrictions under section 127 of the Act on any disposition of the company’s property (including the freezing of bank accounts or transfer of shares, etc.) that apply on winding up and which are back-dated to the presentation of the petition, from coming into effect
- only one Declaration could be filed by a company (unless the new measures allowed otherwise)
- directors could face criminal liability if they did not have reasonable grounds on which to make the Declaration
- for the 90 day (or more, if extendable) Declaration period, a company could not be deemed unable to pay its debts as they fall due under section 123(1) of the Act (and so could not be wound up on that ground under section 122(1)(f) of the Act)
- creditors would, however, have some limited protection by being permitted to apply to the court for approval to lodge a winding-up petition
- to guard against any abuse, the “look back periods” of two years or six months from the onset of insolvency during which any transactions at an undervalue or preferences that are entered into are liable to be unwound by the court (see sections 238 to 241 of the Act), would be extended by the “grace period” covered by the Declaration.
New Interim Administration Moratorium
A new moratorium could be made available, in addition to the existing moratoria provided under the Act in connection with administrations. The features of this might include:
- applying, not only where the directors intend to appoint an administrator, but also:
- where the directors intend to put in place restructuring measures to overcome a temporary COVID-19 related liquidity crisis to avoid insolvency, and
- for a longer period than ten business days (possibly for as long as the 90 day grace period (but no longer than that) mentioned above concerning winding-up petitions).
- extending the “look back periods” in relation to transactions at an undervalue and preferences to cover this new moratorium period as mentioned above in respect of winding-up petitions
- liabilities (but not under the Government’s emergency COVID-19 financing arrangements) incurred during this moratorium would rank ahead of unsecured pre-moratorium liabilities
- creditors being allowed some protection by:
- the court having the power to lift this new moratorium where it is satisfied that there is no realistic prospect of creditors being paid in full after the COVID-19 crisis is over, and
- still being allowed to apply for administration orders (with the court retaining its discretion to refuse the application if it is satisfied that the company faces short term and COVID-19 related issues).