New key insolvency measures introduced – Corporate Insolvency and Governance Act 2020
The bulk of the Act’s provisions became effective as law on Friday 26th June 2020, whilst other provisions have retrospective effect from 1st March 2020.
The key insolvency measures introduced by the Act are:
1. New moratorium outside of a formal insolvency process.
2. New restructuring plan.
3. Prohibition on issuing statutory demands and winding up petitions in connection with Covid-19 related debts.
4. Retrospective suspension of wrongful trading.
5. Protection of supplies of goods and services.
A summary of the draft bill was set out in our earlier blog.
We have set out a summary of below of some of the amendments made to the bill on its journey to obtaining Royal Assent.
A levelling of the playing field for lenders with other creditors
1) The Act sought to address a possible imbalance in favour of lenders by removing the ability for the lender to a company in a moratorium process to accelerate their debt and demanding repayment early from the company if the company were subsequently to go insolvent. This has been addressed by the creation of a “priority pre- moratorium debt”, which excludes “relevant accelerated debt”. However, a lender may still accelerate the debt during the moratorium process.
Specific protection in the context of pensions
2) The Act has given the Pensions Regulator (PR) and the Board of the Pension Protection Fund (PPF) respectively, rights to receive notifications as though they were each creditors of the distressed company during the moratorium process. They are also given rights to challenge the conduct of the company directors and the Monitor. The PPF has been afforded greater scope to draft and impose regulations, with which a distressed company must comply, including the power to grant to the directors a power to exclude managers and trustees from a scheme where they are creditors of the company.
Revival of Government’s power to regulate pre- pack sales to connected persons
3) This power elapsed on 26th May 2020 (having never been used), but has now been revived and will be effective until 30th June 2021. A pre- pack sale is an insolvency procedure where the distressed company itself arranges to sell its assets to a buyer prior to the appointment of any administrators. These assets can include the entire, or parts of the business as a going concern, and are often sold to the existing directors operating under a new company, or other connected persons or parties (for example spouses).
Partial qualification of the powers afforded to the Secretary of State
4) There has been a partial qualification of the wide powers afforded to the Secretary of State, who must now be satisfied that any amended provisions they are looking to introduce, are sufficiently urgent. Additionally, any amendments to the clause conferring this power on the Secretary of State are limited in time, meaning that they must be made within the next two years following the date of enactment.
A “made affirmative” procedure
5) The previously proposed “negative resolution approach” has been replaced with a “made affirmative” procedure. The negative resolution approach would have meant that any statutory instrument or regulation introduced under the Act would be acceptable unless action is taken to the contrary, and as such, its introduction could be blocked. The made affirmative approach seeks to allow for matters to be expedited, by allowing new regulations to be introduced prior to them being scrutinised by Parliament. There is a requirement to put these before Parliament “as soon as possible”, and in any event within 40 days (failing which the regulations will cease to have effect).
Extension of temporary provisions
6) All temporary provisions contained in the original bill which were to expire on the later of 30th June 2020, or one month after the bill is enacted have now been extended to 30th September 2020. This remains extendable thereafter in six month increments.
How meaningful will these amendments be?
It remains to be seen the impact that these amendments will have, and whilst they clearly signal an effort to address some of the more controversial aspects of the original bill, in reality, the changes made appear fairly limited.
Additionally, more pertinent areas of concern, including the wide exclusions from the availability of moratorium, and the concern that the moratorium process may have on suppliers (who lack the standing to apply for an order to suspend supply) who may be left unable to terminate supply agreements with the distressed company in the absence of payment, have not been addressed.
It is important to note that the Act introduced some temporary provisions to help companies struggling with Covid-19 and provide them with breathing room whilst they try to rescue their business together with some more permanent and fundamental changes to UK insolvency law.