LEGAL UPDATE 9 Corporate : bringing balancing to the force

Georgia Quenby examines the key features of the Corporate Insolvency and Governance Act 2020 (CIGA), which creates new tools to bring about company rescue and reconstruction in the UK.

he CIGA is widely heralded downturn in performance is Covid-19 designed to help UK companies and other as introducing the most related; make changes to the reporting similar entities by easing the burden on sweeping changes to UK requirements of companies; and prevent businesses and helping them avoid insolvency insolvency law for a the presentation of most winding-up during this period of economic uncertainty.’ generation. It has petitions. The notes go on to say that the Tintroduced three main features into the This article focuses on the key features purpose of providing breathing space to laws of England & Wales, Northern Ireland of the new plan and the use continue trading and avoid insolvency is and Scotland: of the moratorium as a stepping stone to met because the new laws: • a new freestanding moratorium into the one of three rescue routes: a CVA, a ‘introduce greater flexibility into the Insolvency Act 1986 (IA86); restructuring plan or a recapitalisation. We insolvency regime, allowing companies • a restriction on ipso facto clauses, also don’t have space to cover the temporary breathing space to explore options for rescue known as a restriction on supplier measures or the supplier termination while supplies are protected, so they can have the termination clauses; and restrictions here. maximum chance of survival’ and • a new restructuring plan procedure as ‘protect companies from aggressive part 26A of the Companies Act 2006 Purpose of the new permanent action’. (CA 2006) to allow for arrangements measures and reconstructions of a company in The restructuring and insolvency The same but different? financial difficulty (a new restructuring landscape in the UK has long been The new moratorium shares many features plan under the CA 2006). regarded as secured lender-friendly, so with the moratorium available to a much so that in 2002 the government company whose directors have filed a introduced the Enterprise Act and notice of intention to appoint modernised the regime. In administrators but a key distinction is that the list of the three-tiered objectives of an the new moratorium is a -in- The overarching objective of administration of a company, the first possession process, whereas once this Act is to provide objective for the administrators of a administrators are actually appointed the company was, and still is, to rescue the directors are no longer in control. This is businesses with the flexibility company as a going concern. It is an also true of the new restructuring plan. So and breathing space they indicator of how rarely this first objective is as a package what we have is a serious achieved by an administration that the attempt by the UK government to create a need to continue trading entry criteria to a moratorium include that debtor-in-possession restructuring toolkit, during this difficult time. the company is or is likely to become which will seem like a huge change to unable to pay its and that the secured lenders who are accustomed to the proposed monitor believes that it is likely administration and processes in that ‘a moratorium for the company would which the incumbent directors’ powers to Temporary measures result in the rescue of the company as a bind the company cease immediately. In addition to the above there are a series going concern.’ Both new processes are different in of temporary measures, some of which The explanatory notes to the draft material respects from both their local and modify entry criteria or effects of the three legislation were informative both as to the their American Chapter 11 cousins. The key new elements of the moratorium, the policy drivers and as to the expected use of new processes build on prior experience restriction on supplier termination clauses both the moratorium and the new and plug gaps in existing processes with and the restructuring scheme, and some restructuring plan. The notes provide: the objective of creating a robust, business- standalone temporary provisions. The ‘The overarching objective of this bill is to friendly rescue culture by enabling debtor- standalone temporary measures: mitigate a provide businesses with the flexibility and in-possession reorganisation with the director’s potential personal liability for breathing space they need to continue trading benefit of the breathing space produced by to the extent that the during this difficult time. The measures are the moratorium.

Editor [email protected] Autumn 2020 | 10 LEGAL UPDATE

New moratorium v. administration moratorium

Similarities Differences

The monitor must be a licensed IP, free from conflicts of interest. The holder of a qualifying cannot object to the identity of the monitor whereas they can select the administrators.

Company has ‘breathing space’ from its to allow it to reorganise its Directors remain in place in the new moratorium under the supervision of a business and explore its options for survival. No creditor can commence monitor. Directors are disenfranchised upon the appointment of an insolvency proceedings or enforce its security against a company that has the administrator and the administrator takes full control of the company. benefit of the new moratorium or the administration moratorium. No administrator can be appointed.

Similar to the ‘out of court’ administration route, a company can obtain the The new moratorium prohibits creditors from crystallising floating charges and benefit of the new moratorium upon the presentation of the required legal imposing any restrictions on disposals. The appointment of an administrator is paperwork at court. typically, under a company’s security documents, an event that causes a floating charge to crystallise into a fixed charge.

To enter the new moratorium and the administration moratorium, a company The new moratorium does not require the consent of (and provision of advance must be unable to pay its debts, or is likely to become so. notice to) secured creditors. The appointment of an administrator (by a company or its directors) requires the qualifying floating charge holder to be given five business days’ notice.

The monitor is required to end the new moratorium if he or she thinks that the The new moratorium affords a company a ‘payment holiday’ for debts that fell moratorium is no longer likely to result in the rescue of the company as a due prior to, or during, the moratorium (subject to certain exceptions). going concern. An administrator must end the administration moratorium if he or she thinks that the administration can no longer achieve its purpose.

Suppliers are prohibited from invoking insolvency termination clauses in The new moratorium lasts for an initial period of 20 business days, which can certain contracts with a company that is subject to the new moratorium or an be extended for up to a year but only with the consent of the company’s ‘pre- administration. moratorium creditors’. An administration lasts for an initial period of one year.

The new restructuring plan shares many features with a part 26 CA 2006 but again there are key differences, in particular with the inclusion of ‘cross-class cram down’.

Restructuring plan v. scheme of arrangement

Similarities Differences

Both a restructuring plan and a scheme enable a company to compromise the The restructuring plan includes a ‘cross-class cram down’, which means that, rights of secured creditors, unsecured creditors and shareholders. if certain conditions are met, the restructuring plan may be imposed on a dissenting class of creditors.

Both a restructuring plan and a scheme are court processes and require court The ability to cram down dissenting classes in a restructuring plan is likely to approval. The court exercises a discretionary power to approve the terms of incentivise a company to propose multiple smaller classes to ensure that the both a restructuring plan and a scheme – court approval is not a ‘rubber plan succeeds, in contrast to the approach taken to class composition in a stamp’. scheme.

The court processes for a restructuring plan and scheme are very similar and A restructuring plan requires the approval of at least 75% in value of the include a convening hearing and a sanction hearing. voting creditors in each class. A scheme requires at least 75% in value, and a majority in number, of the voting creditors in each class.

Both a restructuring plan and scheme are available to domestic and foreign To enter a restructuring plan, a company must be experiencing, or be likely to companies that can demonstrate ‘sufficient connection’ with England and experience, financial difficulties and the purpose of the restructuring plan must Wales. be to eliminate or reduce those difficulties.

If a company that is subject to the new moratorium enters into a restructuring Prohibition on ipso facto clauses in a restructuring plan. plan or scheme, the new moratorium terminates once the restructuring plan or scheme is sanctioned.

| Autumn 2020 Editor [email protected] LEGAL UPDATE 11

Decision tree and the view of the auditors of the The decision tree below indicates the likely choices and consequences facing a company company. In particular we expect the in financial difficulty now that the moratorium and restructuring plan are available. company to be focused on achieving sign off of its accounts on a going concern basis after the moratorium. Is the company unable to pay its debts or is likely to become unable to pay its debts? In combination, this will mean that the company, the monitor and the auditors will need rapidly to reach a consensus not just Yes No as to the company’s operations during the moratorium (including, critically, as to funding of the business during the Is the company ‘eligible ‘ for a moratorium? Has the company encountered, or is it likely moratorium), but also as to the route out of to encounter, financial difficulty that may the moratorium. No Yes affect its ability to carry on business as a Consider going concern? How and when does the moratorium insolvency start? No Yes Usually entry into the moratorium will be Would a moratorium result in the rescue of an out-of-court process followed by notice the company as a going concern? to creditors. Company is The company can Termination of the moratorium No Yes Consider not insolvent consider a The monitor can terminate the insolvency restructuring plan moratorium if the monitor thinks: or a scheme of • the objective of rescuing the company as arrangement a going concern has been achieved; Enter a moratorium if desired with a planned • the moratorium is no longer likely to excit by way of: result in a rescue of the company; • the company is unable to pay (i) moratorium debts or (ii) pre- moratorium debts for which there is no Restructuring plan CVA Recapitalisation payment holiday, which have fallen due Is the exit plan successful? (the current obligations); or • the monitor is unable to carry out its duties because the directors are not No Yes Consider providing the necessary information insolvency allowing the monitor to carry out the role. In going into the moratorium the Company is rescued as a going concern company and its advisors will know what its current obligations are likely to be and these should be in the relevant short-term cash flow forecasts, along with any Moratorium requirement for additional funding. This The new moratorium creates breathing will almost certainly lead to negotiations space for the company by preventing with senior lenders, at least, upfront to creditors from taking any of the following As a package what we have ensure buy-in and the continued provision action: of finance, given that lenders are not • enforcement of security; is a serious attempt by the required to provide new money to a • starting or continuing insolvency UK government to create a company in a moratorium. proceedings; • crystallisation of floating charge or debtor-in-possession Payment holiday restricting disposals of floating charge restructuring toolkit, which The company has a payment holiday for assets; pre-moratorium debts. ‘Pre-moratorium • starting or continuing legal proceedings will seem like a huge change debts’ means debts that fell due prior to (or against the company (with some limited to secured lenders. during) the moratorium. These are exceptions); analogous to ‘provable debts’. ‘Moratorium • repossession of HP/conditional debts’ means debts incurred during a sale/leased assets without permission of moratorium – eg rent, wages and expenses. court; and issued certain types of bonds, insurance These are analogous to ‘expenses’ and the • forfeiture by landlords. companies, PPP companies and government has suggested parties use the There is also an embedded incentive securitisation companies. Nortel case as a guide in cases of doubt. for a finance provider under a contract for There are exceptions to the payment financial services not to accelerate their The prospective insolvency test holiday for: , which is that they would lose a super- The moratorium requires that the • debt incurred under financial services priority status in a subsequent insolvency if company and the prospective monitor contracts (including loan and credit the moratorium fails in its objective of agree that the company is unable or is agreements and receivables purchase rescuing the company as a going concern. likely to become unable to pay its debts, arrangements, but excluding Although most English companies are and that the moratorium would be likely to accelerated debts); eligible for the protection of a moratorium, result in the rescue of the company as a • rent in respect of a period of use during new schedule ZA1 to IA86 sets out a list of going concern. moratorium; companies that are not eligible, for There is a clear intersection here • goods or services used during example banks, companies that have between the legal nature of the condition moratorium;

Editor [email protected] Autumn 2020 | 12 LEGAL UPDATE

• monitor’s fees and expenses; present and voting whose rights are (whether they are secured or unsecured) • redundancy payments; and affected by the plan. have not supported the company’s exit • certain wages/salary payments. It is worth noting that creditors or strategy or been compromised by a CVA or members who do not have a ‘genuine a restructuring plan then the company is Restructuring plan economic interest’ in the company may be likely to enter insolvency, whether The new restructuring plan shares heritage excluded from voting (which may include voluntarily or involuntarily. It is this with the CA 2006 scheme of arrangement shareholders). This new feature enables prospect of failure that will keep directors (Part 26 scheme), company voluntary out-of-the money classes of creditors to be and monitors’ feet to the fire in terms of arrangements under IA86 and a excluded from the process, provided the having sufficient funding and a viable exit reorganisation under Chapter 11 of the US court is persuaded that they do indeed substantially advanced as they enter a Code. The government’s have no such genuine economic interest. moratorium. explanatory notes make it clear that the There are certain ‘special cases’ who new restructuring plan is deliberately get protection, such as pre-moratorium The reality? similar to a scheme of arrangement and financial creditors, who cannot be Stressed companies usually turn to their indicates that jurisprudence on matters compromised or crammed down without lawyers and accounts to seek restructuring such as class construction should be used to their consent (even if 75% of their class solutions that have generally focused on assist in determining creditor voted in favour of the plan) if the the use of a CVA or a recapitalisation. Now classifications in a restructuring plan. restructuring plan is proposed within 12 that the restructuring plan tool is available, The restructuring plan is inserted into weeks of the end of a moratorium. we expect those companies to explore CA 2006 but it is, nevertheless, a Generally, however, the conditions to cross- whether that may be a suitable method for compromise or arrangement procedure class cram down are that: dealing with the cause of actual or specifically applicable to companies in, or • Condition A: the court is satisfied that if anticipated financial difficulty, with the anticipating, financial difficulty. This is a the plan were to be approved, none of goal at the end to have a rehabilitated court-supervised procedure. An the members of the dissenting class business whose accounts can be signed off application is made to court to convene a would be any worse off than they would on a going concern basis. meeting of creditors or shareholders (or be in the event of the relevant It may well be that a moratorium the relevant classes of creditors/members), alternative. provides a suitable stepping-stone to one of and a statement is sent to creditors/ • Condition B: the plan has been agreed these restructuring tools. members which: by at least 75% in value of a class of In all of these scenarios stakeholder • explains the effect of the proposed creditors/members who would receive a buy-in will be the key to ensuring that a compromise or arrangement; and payment, or have a genuine economic funded plan can be developed, negotiated • states any material interests of the interest in the company, if the relevant and carried out without undue reliance on directors (in any capacity) and the effect alternative were to occur. court intervention. on those interests of the proposed plan. The following conditions are specified Conclusion in the legislation for availability of the The pendulum has now swung away restructuring plan: from the or administrative • Condition A: the company has receivership- and creditor-dominated encountered, or is likely to encounter, The moratorium requires decision making of the latter half of the financial difficulties that are affecting, that the company and the 20th century towards a debtor-oriented or will or may affect, its ability to carry rescue culture. The policy objective of on business as a going concern; and prospective monitor agree enabling company rescue and encouraging • Condition B: a compromise or that the company is unable debtor-in-possession reorganisation is arrangement is proposed between the clear, but creditors in exchange are company and its creditors, or any class or is likely to become unable receiving statutory protections provided or them, or its members, or any class of to pay its debts. that they do not destabilise a rescue in them the purpose of which is to progress. eliminate, reduce or prevent, or We can expect to see new mitigate the effect of, any of the implementing rules given the declared financial difficulties which are affecting, The ‘relevant alternative’ is described culture of anti-avoidance, and new or will or may effect, its ability to carry as being whatever the court considers jurisprudence developing the law in this on business as a going concern. would be most likely to occur in relation to area, especially given the wide powers for The company, a creditor or a member the company if the restructuring plan were affected parties to apply to court during a can propose a plan, as can the not sanctioned. Given the ‘financial moratorium and the court-supervision and administrators of a company. The plan can difficulties’ entry requirement it is sanction role in the new restructuring plan. cover a wide range of and reasonable to expect this will generally be While the scales may be intended to be in creditor and shareholder reconstructions, an insolvency procedure and so an balance there could be a few more swings including acquisitions. estimated outcome statement will provide a one way or the other on the way to true useful comparator for the court in making equilibrium. Voting this determination. Classes are typically classified according to The court has ultimate discretion the following principle: a class is ‘those whether to approve a plan but, if approved, persons whose rights are not so dissimilar the plan is binding on the company and all as to make it impossible for them to consult its creditors and members. together with a view to their common GEORGIA QUENBY is a interest’. A failed moratorium? partner at Morgan, Lewis Once the classes have been confirmed If a company that has entered a & Bockius UK LLP and is there will be meetings of each class where moratorium is unable to be rescued as a also a licensed insolvency the relevant creditors/members or relevant going concern then the moratorium practitioner. classes vote on the plan. The required terminates. The rights of the creditors who threshold is 75% by value of those have been stayed by the moratorium spring creditors/members (or relevant classes) back into life and so if those creditors

| Autumn 2020 Editor [email protected]