On 20 May the Government published its long-awaited Corporate Insolvency and Governance Bill setting out proposed restructuring and insolvency reforms and related coronavirus measures to bring in measures announced as far back as 28 March 2020. These fall into protective measures currently due to expire on 30 June 2020 to limit the impact and risk of insolvencies during the COVID-19 crisis, and long term changes to the way restructurings and insolvencies are managed.
The Bill remains draft so there is a possibility of change. However, we expect amendments will be minor when the Bill comes up for second reading on 3 June.
The broader reforms have significant challenges and risk being a missed opportunity to add effective and valuable tools to the restructuring toolkit. However, the Secretary of State will have flexibility to make future modifications to the legislation, probably a pragmatic solution for fine tuning a complex piece of legislation which has needed to move at unusual speed.
Initial areas we think warrant further thought and development include:
This had the potential to be a real game changer and had long been seen as a necessary additional tool for restructuring professionals. However:
- it focuses narrowly on the rescue of companies, rather than businesses and would not be available to shield a company through an accelerated marketing process to achieve a going concern sale of the business. Where rescue is not possible, this will not make going concern sales easier
- it requires the proposed monitor to certify they consider a rescue of the company is likely. This sets a high threshold which may be difficult to reach, perhaps contingent on buy in from the company, its shareholders, financial and trade creditors, other stakeholders and varying levels of court sign off. This could be resolved either by lowering the threshold to a “reasonable prospect” rather than “likely”, or extending the confirmation to being that a rescue of the “company” and/or “business” is likely
- the level of work required from the monitor is not dissimilar from an administration, at least on a light touch basis. Without change, and bearing in mind other reforms to limit the impact of termination clauses on insolvency, there is a risk that the moratorium’s only advantage over administration will be one of perception while the monitor will face greater personal risk of challenge to their judgement, conduct and remuneration than if they were administrator.
Another area that might benefit from clarification is liabilities that need to be kept current during the moratorium, including:
- costs and expenses of the moratorium and liabilities incurred during the moratorium period
- all employment liabilities, whether relating to the moratorium period or before, and in particular redundancy payments
- rent for the period of the moratorium, analogous with administration
- liabilities under contracts relating to financial services, which include lending. This means a moratorium may be difficult to achieve without the support of financial creditors, especially if a deferral of debt service is necessary to manage cashflow.
In the event that the moratorium fails and is followed by an administration or liquidation, the above amounts will be granted priority as expenses, behind costs of the process but ahead of floating charge recoveries. That immediately gives rise so concerns such as:
- redundancies may have to deferred until an insolvency process occurs
- if a moratorium fails due to acceleration by an unsecured lender, it would arguably see its claim elevated from unsecured to an expense of the insolvency process. This seems counterintuitive.
Protection of supply
The proposed reforms included a wide-ranging protection against suppliers seeking to leverage ransom positions against companies in administration or a moratorium. Unfortunately, these do not go as far as was hoped, being limited to where there is a formal supply contract which is terminable on insolvency, and do not protect against situations where a trading relationship is not formalised. Simply having the ability to require suppliers to justify hardship as a ground for termination would have been a useful tool to reframe a negotiation with a ransom creditor.
The new restructuring plan is broadly a variation of the existing approach to schemes of arrangement, with a convening hearing, constitution of class meetings and court sanction forming the core of the process. The changes appear minor but have the potential to be far reaching and significantly affect the balance of power in restructuring negotiations:
- certain classes of creditor or member can be excluded on the basis they have no real economic interest. The plan will still be able to affect their rights, but they will not have approval rights, only the ability to challenge the plan at court
- the company has a second chance to exclude dissenting creditors. Classes rejecting a plan can still be bound if those with a genuine economic interest vote in favour and it can be shown that dissenters are left in no worse position than on a comparator insolvency.
- approval will be 75% by value, excluding the 50% by number test applicable to schemes.
The incentive will be for the company to justify as many separate classes as possible in the hope that at least one approves, increasing the risk of certain stakeholder groups being forced into the restructuring plan. In practice, as with schemes, it is likely that the workable parameters of a plan are likely to be developed through court argument and so heavily influenced by the appetite of parties to litigate.