The height of a global pandemic may not seem like a particularly propitious time to roll out a transformative piece of corporate legislation, but in June 2020 the UK’s Corporate Insolvency and Governance Act (CIGA) came into force.
The Insolvency Service described it as the most significant change to the UK’s corporate insolvency regime in more than 20 years.
And one of its key provisions was the introduction of the new role of a monitor to oversee a corporate moratorium: an extendable, 20-working-day period giving businesses protection from creditor action – unless they have the permission of the court – while the business seeks professional restructuring advice.
CIGA gives companies time to present a restructuring plan to stakeholders
Andrew Wollaston, EY
The benign impact of state support since the onset of Covid-19 is clear to see. The monthly insolvency statistics for March, covering England and Wales, show that the number of registered company insolvencies (992) was 20% lower than the figure for the same period in 2020 and down 37% from March 2019.
CIGA has also introduced a new restructuring plan that can bind creditors to it. Under the new regime, the court can only sanction such a restructuring plan if it is ‘fair and equitable’ – so creditors still vote on the plan, but the court can impose it on dissenting creditors in a process called cross-class cram down.
While the moratorium is overseen by an insolvency practitioner, responsibility for the day-to-day running of the company remains with the directors. This ‘debtor-in-possession’ approach is notable, since it introduces an element of the US Chapter 11 procedure.
Chapter 11 allows a company to get the protection of the court and borrow money known as debtor-in-possession (DIP) financing, to enable it to present a restructuring proposal to creditors.
This financing is used to facilitate the reorganization of a DIP by allowing it to raise capital to fund its operations as its bankruptcy case runs its course. It is distinct from other financing methods, in that it usually has priority over existing debt, equity and other claims.
These are significant developments, since historically the UK insolvency regime has been largely creditor driven, explains Andrew Wollaston, global turnaround and restructuring strategy leader at EY.
“When compulsory liquidation was chosen for some very large cases, it was a sign that the UK needed to evolve its insolvency legislation,” he says. “CIGA gives companies time to present a restructuring plan to stakeholders.”
Cross-class cram down
The restructuring plan can be versatile, allowing the company to address secured and unsecured liabilities and equity. This is the first time cross-class cram down has been used in UK legislation and gives companies an alternative to insolvency procedures to address financial and operational liabilities.
“However, there are no DIP financing or debtor in financing measures in place yet, which is really important because many companies on the verge of bankruptcy do need alternative funding,” says Wollaston.
He expects CIGA to be widely used by companies that overtrade, as economies rebound post-coronavirus and run into liquidity issues.
Several European jurisdictions have passed legislation for similar restructuring procedures. However, Wollaston notes that CIGA’s restructuring plan allows both operational and financial liabilities to be addressed, unlike the German scheme “which due to last-minute amendments is a financial restructuring-focused procedure”.
The restriction on winding up petitions under CIGA was intended to last until September 30, 2020, but was subsequently extended until June 30, 2021, and the power to extend the enforcement moratorium has been pushed out until April 29, 2022.
The knock-on effect is that banks will recover less under their floating charges
Jeremy Boyle, Summit Law
Jeremy Boyle, managing partner and head of insolvency at specialist corporate insolvency law firm Summit Law, observes that this is keeping hundreds – if not thousands – of companies afloat at a time when UK companies have accumulated more debt than ever.
Ross Walker, chief UK economist at NatWest Markets, has said it is reasonable to assume that UK firms will have accumulated an extra £100 billion of debt by the time the crisis is over.
The suspension of wrongful trading provisions is expected to be withdrawn on June 30, 2021.
“The jury is out as to whether this has had any real impact, as wrongful trading actions are relatively rare,” says Summit Law’s Boyle. “I say this given that other director duties remain in force.”
HMRC is often the largest creditor in small and medium-sized enterprise (SME)-type insolvencies and the tax authority’s regaining of its preferential creditor status is expected to substantially reduce the payment of dividends in insolvencies to ordinary unsecured creditors.
“The knock-on effect is that banks will recover less under their floating charges, which means there will be more recourse to personal guarantees,” concludes Boyle.
