On 20 May 2020, the UK government introduced the Corporate Insolvency and Governance Bill (the Bill) to Parliament. The Bill went through a fast-track approval process in Parliament, received Royal Assent on 25 June 2020 and entered into force on 26 June 2020 as the Corporate Insolvency and Governance Act 2020 (the Act). The Act introduces a number of temporary and permanent measures which are designed to provide relief and support to businesses affected by COVID-19.
Whilst some of the changes to the UK insolvency legislation framework are significant, their immediate practical effects on securitisation transactions appear to be minimal, but would depend on a detailed analysis of the structure of individual transactions. Typically, a securitisation SPV issuer would anyway have the added benefit of limited recourse and non-petition wording. However, market participants should give consideration not only to the position of the securitisation SPV issuer, but also to the position of other UK corporates involved in the transaction, such as originators, servicers and any affiliates of an issuer which may provide support to the transaction.
A key element of the Act is the introduction of a new company moratorium, which allows the directors of eligible companies experiencing financial difficulties to obtain breathing space from creditor action. This would be for an initial period of 20 business days, which can be further extended by the directors for an additional 20 business days, or for longer with the consent of the pre-moratorium creditors or the court. This measure is intended for companies with a viable prospect of survival, and will allow such companies to restructure or obtain new investment without creditors being able to take legal action. Whilst the directors would remain in control, the process is overseen by a "monitor" who must be a licensed insolvency practitioner. The process of obtaining a moratorium is commenced by the company itself making a court filing. This must be accompanied by (i) a statement from the directors that, in their view, the company is, or is likely to become, unable to pay its debts and (ii) a statement from the proposed monitor that it is likely that a moratorium would result in the rescue of the company as a going concern.
The main effect of the moratorium is the restriction on a range of enforcement actions, similar in scope to those applicable when a company is in administration. These include a prohibition on the enforcement of security, without the permission of the court, by the company's creditors (apart from financial collateral or a collateral security charge), and also a "payment holiday" for certain debts of the company. During the moratorium, a payment holiday will apply in respect of a wide range of "pre-moratorium debts", including debts that are due and payable during the moratorium under contracts entered into before the moratorium, as well as amounts that became due and payable before the moratorium. However, certain moratorium debts, such as the monitor's fees, salaries and rent, are excluded from the payment holiday. Crucially, securitisations and other capital markets transactions may fall within exceptions to being (i) eligible for a moratorium, or (ii) even if eligible, being able to apply the payment holiday to certain types of contracts (see "Impact on structured finance" below).
As well as placing a prohibition on the enforcement actions which may be taken by creditors, such as the enforcement of security, the payment holiday imposes a limitation on the actions which can be taken by directors without the consent of the court or the monitor (for example, in respect of dealings with property).
Temporary measures – restrictions on winding-up petitions and suspension of liability for wrongful trading
The Act temporarily (from 1 March 2020 to 30 September 2020 (the relevant period)): (i) introduces a ban on the presentation of winding-up petitions for failure to pay a statutory demand served during the relevant period, or on any other grounds unless the creditor has reasonable grounds for believing that the circumstances forming the basis for the winding-up petition would have arisen but for COVID-19; and (ii) relaxes the rules around the wrongful trading provisions of the Insolvency Act 1986.
This temporary relaxation around wrongful trading does not apply to directors of companies which are ineligible for a moratorium under the terms of the Act and certain other regulated entities.
While the relaxation of the rules does not provide a general defence to the imposition of directors' liability for breaches of their duties, the court will assume, for the purposes of any wrongful trading claim, that a director is not responsible for any worsening of the financial position of a company or its creditors during the relevant period. This enables directors of companies which have been affected by the COVID-19 pandemic to make decisions concerning the affairs of the company without the fear of personal liability if the company becomes insolvent.
In order to reduce the pressure on companies, the timeframes and deadlines for the filings of accounts with Companies House have also been extended temporarily. The Secretary of State is empowered under the Act to make further extensions for the filing of accounts and other filing deadlines, including the period for registration of security, if required.
Suspension of termination clauses for suppliers of goods and services
The Act prevents suppliers of goods and services to a company, which is subject to a "relevant insolvency procedure" (all main UK insolvency procedures including the new moratorium but not including schemes or restructuring plans), from relying on contractual terms to terminate or vary such contracts triggered by the insolvency procedure (known as "ipso facto" clauses), provided the supplies continue to be paid for. However, the Act includes safeguards allowing the court to relieve the supplier of their obligation to continue the contract if it would cause financial hardship to the supplier.
These provisions only apply to contracts for the supply of goods and services and not to financial contracts. Similarly, certain entities involved in the provision of financial services are excluded from their ambit, including where either the company or the supplier is a "securitisation company" within the meaning of the Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296) (see "Impact on structured finance" below), and the Act also contains a temporary exclusion for "small entities".
In addition, among other exemptions, if a contract for the supply of goods or services is an agreement which is, or forms part of an arrangement involving the issue of a capital market investment, the provisions of the Act suspending termination clauses for suppliers of goods and services do not apply to such a contract (see "Securitisation companies and parties to a capital market arrangement ineligible for new moratorium " below for a summary of the definition of "capital market investments").
Impact on structured finance
Overall, the impact of the Act on structured finance transactions should be minimal, due to several wide exemptions which apply.
Securitisation companies and parties to a capital market arrangement ineligible for new moratorium: The newly inserted Schedule ZA1 to the Insolvency Act 1986 contains a long and complex list of exclusions for the types of entities which are outside the moratorium provisions. Investment firms, banks, insurance companies, securitisation companies and parties to a capital market arrangement are all excluded entities.
A capital market arrangement includes, among other things, a transaction where broadly speaking there is:
- the issue of a capital market investment
- a grant of security to a trustee;
- on behalf of the holder of a capital market investment; and
- debt of at least £10 million.
Capital market investments are either (i) bonds or other instruments creating or acknowledging indebtedness which are rated, listed, traded (or designed to be rated, listed or traded), or (ii) bonds or commercial paper issued to professional, high net worth or sophisticated investors.
A securitisation company is defined as a securitisation company within the meaning of the Taxation of Securitisation Companies Regulations 2006 (S.I. 2006/3296) (see Regulation 4 of those Regulations), being:
- a note-issuing company;
- an asset-holding company;
- an intermediate borrowing company;
- a warehouse company; or
- a commercial paper funded company,
with an additional requirement that such company must have a retained profit.
Capital market investments exempt from payment holidays: Even if an issuer in a structured finance transaction were eligible for the new moratorium, payment holidays are not applicable to "capital market investments", such being listed as one of the contracts excluded from the payment holidays provision in Schedule ZA2.
Capital market investments, and contracts where either the supplier or the company being supplied is a securitisation company, are outside prohibition on termination of goods and services supply contracts: The prohibition on the termination of services supply contracts does not apply to agreements which are, or form part of, an arrangement involving the issue of a capital market investment, or where either the supplier or the company being supplied is a securitisation company.
The disapplication of most of the material provisions of the Act to structured finance transactions by means of the exclusions for securitisation companies, parties to a capital market arrangement and for capital market investments is welcome. This particularly makes sense given that in a securitisation the exposure is to a pool of underlying assets and not usually to the credit worthiness of an operating business. In a stressed scenario, investors in the securitisation may need to enforce their security over the underlying assets expeditiously. Such investors would not want to suddenly discover that the issuer SPV has the benefit of a moratorium or a payment holiday, when such provisions were really designed to protect an operating business and its employees (and not structured finance vehicles, although it should be noted that not all securitisation companies are SPVs – for example, some whole business or CMBS transactions).
Furthermore, the bankruptcy remoteness of the issuer SPV is already a key feature of such transactions. The central components of this are (i) non-petition clauses, whereby the creditors in the transaction agree not to initiate insolvency proceedings against the issuer until all the liabilities have been discharged, and (ii) the limited recourse provisions, which limit the issuer's payment obligations to the funds it has available. Therefore, it is paramount that any insolvency process, such as a moratorium, which may interfere with or disrupt the operation of the SPV and the performance of the transaction is appropriately protected against.
Where a legal opinion on enforceability is to be provided for a structured finance transaction, consideration should be given to the effects of the Act on any such opinion.
The Act introduces a number of significant changes to UK insolvency law which are designed to provide support to businesses struggling as a result of COVID-19. While care should be paid to the provisions of the Act, on balance, structured finance transactions should remain largely unaffected as a result of the broad exclusions which exists for such transactions under the Act.