Progress of the Bill to date
- Second Reading House of Lords – 9 June 2020. Amendments proposed.
- Committee Stage 16 June 2020
- Third Reading House of Lords – 23 June 2020
- Expect to come into force end June/Early July
Certain permanent aspects in the planning for years, eg moratorium, schemes and termination provisions.
Other temporary measures have been added in haste and subject to no consultation, eg changes to stat demands, petitions and wrongful trading.
NB Section 18(2) “Regulations under this section may make different provision for different purposes”. This section confirms that changes may need to be made after the legislation is enacted.
- Section 1 of the Bill inserts a new Part A1 before Part of the IA ‘86
- Eligibility criteria are in a new Schedule ZA1 which is at schedule 1 of the Bill and replaces schedule A1 (CVAs) entirely.
- Schedule 3 sets out a list of amendments to the IA86
- Schedule 4 contains Temporary Rules which expire at end of relevant period (end June or one month after coming into force, presumably to be replaced by permanent rules. Rules deal with time limits service of notices etc.
- Companies, Unregd Cos, LLPs and certain overseas companies
- All rules relating to small companies have gone.
- Exclusions for various insurance and financial type companies.
Officer of the court
- Duty to monitor affairs the company to ensure that the Moratorium remains likely to result in the rescue of the company as a going concern, so there is a continuing duty.
- Can rely on info provided by company unless reason to believe it is inaccurate.
- Can request info from directors.
- Directors must respond as soon as practicable.
- Can file a notice at court to terminate if opinion changes or rescue successful.
- Provisions for changing monitor, challenging monitor’s decisions and allowing a subsequently appointed liquidator or administrator to challenge his remuneration.
It was originally thought company would have to show financial viability. This has gone but replaced by statement to be made by the monitor (see below), so just a slight change of emphasis.
Application where no petition – Out of Court Procedure
No standard forms.
File at court:
- Notice that Directors seek a moratorium
- Statement from directors that company is or is unlikely to become unable to pay its debts.
Statement from the monitor that
- He is qualified
- Consents to Act
- Company is eligible
- In his view the Moratorium is likely to result in the rescue of the company as a going concern, so mirroring the first administration objective.
Moratorium comes into force on the date of filing and lasts for 20 days. [NB this is a change from the 28 period in the consultation document].
Application where petition issued – Court Application
Exactly the same documents are required except the notice is replaced by a court application.
Not clear whether the court will treat as urgent and list immediately or list at same time as petition. Probably the former, because court envisages a long delay between issue and hearing of petitions.
Court can order the moratorium or make such order as it thinks fit.
Court will only ever order a moratorium if satisfied that the outcome will be better than a winding up. Hard to imagine that it could come to a different conclusion given the statement required to be made by the monitor as to the rescue of the company as a going concern.
The moratorium would come into force on the date of the order.
By Directors without consent
By filing a notice at court after 15 days containing a statement that:
- All post Moratorium debts have been paid
- All pre-moratorium debts for which there is no payment holiday have been paid
This means all debts except the following:
- Debts for supplies made during the moratorium
- Monitor’s remuneration.
- Company likely to become unable to pay its other pre-moratorium debts
A statement from the monitor that the moratorium is likely to result in the rescue of the company as a going concern, [or would do so if it were not for the worsening of the financial position of the company due to the coronavirus pandemic]. These words are in the temporary rules at schedule 4.
The moratorium is extended for a further period of 20 days starting with the day after the expiry of the initial period, so day 21.
Extension with Creditor consent
The process is exactly the same as above except:
A statement must be filed confirming that creditors consent and agreed period of extension, which can be up to one year.
Can extend numerous times but max period is 1 year.
Consent must be obtained from pre-moratorium creds (because sums accruing due during the M should be paid)
Using a qualifying decision-making procedure.
Extension by the Court
Court application required. Same documents as 1. above.
It is a requirement to confirm if creditors have been consulted. If not, why not. Therefore, always consult and good practice to file evidence.
Statement from monitor that Moratorium is likely to result in the rescue of the company as a going concern, [or would do so if it were not for the worsening of the financial position of the company due to the coronavirus pandemic].
Court can extend to such date as it thinks fit or make any other order as it thinks fit.
Court must consider the interests of pre-moratorium creditors and the likelihood of the company being rescued as a going concern. Unlikely it would disagree with the statement of the monitor in this regard.
It isn’t clear how the court can assess this unless the monitor’s statement goes into some detail. The temporary rules don’t specify anything other than name, IP number, RPB and consent to act.
CVAs and schemes of arrangement
Moratorium is automatically extended until CVA approved or rejected.
Can be extended by the court as part of a new scheme of arrangement.
The moratorium ends when the company enters a formal insolvency process, instigated by the directors.
NB Section A20(1)(f) and (g) the moratorium does not end if a company serves notice of intention or notice of appointment, only if the directors do so.
Effects of moratorium
- Same as for administration
- Can’t obtain credit exceeding £500 without disclosing the moratorium.
- Can grant security during moratorium but only if Monitor consents, and security can be enforced
- Restriction on payment of pre-M debts
- Can’t make payments exceeding £5,000 or 1% of unsecured debt whichever is greater in respect of pre-M debts where no payment holiday without consent of Monitor or court order
- Restriction on disposal of company property, unless
- Ordinary course of business
- Consent of Monitor
- Court order
- Disposals of charged property mirror schedule B1 for administrations.
Moratorium debts – priority
Schedule 3 inserts a new S174A IA ‘86
Where w/u proceedings commenced (compulsory and CVL) within 12 weeks of the end of the M, the following have priority over all other debts:
- OR’s fees
- Moratorium and pre-moratorium debts where there is no payment holiday.
- Further details of the priority within this class are in Rule 42 of the temporary rules in schedule 4.
- Debts for supplies which would not have been made during M but for the new termination provisions
- Monitors remuneration.
NB, all of the above come ahead of the liquidator’s remuneration, so a very unattractive prospect for an IP.
Section 8 simply introduces Schedule 10
“Schedule 10 contains temporary provision in relation to winding up petitions in Great Britain”
These provisions are temporary and only apply during the “relevant period” as defined.
When these provisions were signalled by the government in April it appeared that they would be limited to outstanding rent, but these provisions are unlimited and apply to all debt.
A creditor can’t issue a winding up petition based on a statutory demand served during the relevant period which is 1/3/20 and 30/6/20 or one month after the Bill comes into force whichever is later.
Para 1(4) This paragraph comes into force on 27/4/20. (What is the status of this if the Bill isn’t in force? Courts will apply it anyway.)
A creditor can’t present a petition during the relevant period unless they satisfy the following specific condition.
The creditor has to state in the petition that they have reasonable ground for believing that Coronavirus has had no financial effect on the debtor or the debt would have arisen anyway.
Rules as to content of the petition have been changed to include this requirement.
How is the creditor going to know this?
Coronavirus has affected every business financially!
Not clear who is going to check the petition for this confirmation, court staff or judge?
The relevant period for this section is 27/4/20 to 30/6/20 or one month after enactment, whichever is later.
NB power to alter/extend this period.
Petitions presented after 27/4/20
If the court is satisfied that the conditions are not met court can restore the position to what it would have been if petition had not been issued.
Not clear what this means as probably no detriment. Advertisement provisions don’t apply until court has scrutinised the petition and decided to issue it.
Restrictions on Winding up orders
Where a creditor issues a petition during relevant period (so the court is satisfied the conditions are met at issue stage) the court can still make a w/u order if satisfied that other non-coronavirus grounds existed.
Winding up order made before commencement
Where a winding up order is made on or after 27/4/20
But court wouldn’t have made the order if previous provisions had been in force, the court is regarded as having no power to make the order, therefore the W/U order is void.
No liability on OR or Liquidator for any steps taken up to this point.
Court can make such order as it thinks fit for restoring the company to the position is was in prior to the petition. It isn’t clear in practice how this is possible given the damage that will have been sustained.
If OR believes the order is void he must refer it back to the court.
Provisions applying where a valid winding up order is made after 27/4/20
Winding up is deemed to commence on the date of the order not the petition.
Therefore section 127 has no application.
Numerous variations to timescales referable to commencement, such as prior transactions
Eg TUV relevant time is 2 years ending with onset of insolvency
Changed to 2 years prior to petition or 2 years and 6 months from date of w/u order whichever is later.
Similar changes apply to preferences, avoidance of floating charges and offences under IA 86.
These changes reflect an acceptance that there will be lengthy delays between petition and order. This is why an application for a moratorium is likely to be dealt with before the petition hearing.
Section 10 of the Bill
“For the purpose of determining the contribution if any to a company’s assets that it is proper for a person to make, the court is to assume that the person is not liable for any worsening of the financial position of the company or its creditors that occurs during the relevant period”
The relevant period is 1/3/20 to 30/6/20 or coming into force of Act if later. (NB can be extended)
So, no discretion, no rebuttable resumption. Referable to time so very black and white.
The House of Lords have suggested an amendment to change the assumption to a rebuttable presumption. It is not yet clear whether this amendment will be made.
There is no express prohibition on a compensation order being made against a director who is found liable for wrongful trading as part of proceedings under the CDDA but it seems likely that this would be contrary to the spirit of the government’s intention and therefore unlikely.
- All other directors’ duties remain unchanged.
Clause 7 and Schedule 9 of the Bill introduce a new Part 26A into the Companies Act 2006 pursuant to which a company in financial difficulty can propose a restructuring plan, which allows it to compromise certain creditors, or classes of creditors, or members, or classes of members.
A restructuring plan is an alternative tool to a CVA and a scheme of arrangement, albeit it will operate much in the same way that the current scheme mechanise does and much of the practical machinery of a restructuring plan is based on the process for a scheme of arrangement.
The ‘scheme of arrangement’ procedure is predominantly used to undertake the restructuring of companies with complex capital arrangements, is flexible and has been used in increasingly creative ways to address a variety of financial challenges faced by companies and give them improved chances of future viability.
However, it does lack a key feature which limits its effectiveness and puts it at a disadvantage compared to the restructuring frameworks of a number of other jurisdictions (such as the US Chapter 11 model) and that is cross-class cram down (CCCD). Without CCCD, a single class of creditors can block a scheme from being agreed even when it is in the company’s and creditors’ interests.
So, whilst a restructuring plan is similar to a scheme of arrangement, it includes the ability for a company to bind a class of creditors or members to a restructuring plan even where not all classes have voted in favour of it provided that the restructuring plan is fair and equitable.
Unlike a CVA, it will have the ability to bind both secured creditors and unsecured creditors.
A restructuring plan is available to every company which is liable to be wound up under the Insolvency Act 1986, which includes foreign companies.
A restructuring plan is available to companies who satisfy two conditions. The first is Condition A which is:
(2) “that the company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern
And Condition B which is
- A compromise or arrangement is proposed between the company and –
- Its creditors or any class of them, or
- Its members or any class of them, and
- The purpose of the compromise or arrangement is to eliminate, reduce or prevent or mitigate the effect of, any of the financial difficulties mentioned in subsection (2)
The process to approve a restructuring plan is similar to a scheme of arrangement. That is an application to Court for permission to convene a meeting of creditors or members (or classes of each), followed by a meeting at which members and/or creditors will vote on whether to approve the restructuring plan and then a further application to Court to ask it to exercise its discretion to sanction the restructuring plan.
The application can be made by the Company, any creditor or member of the company, or if the company is being wound up, the liquidator, or if the company is in administration, the administrator.
All creditors or members who are affected by the compromise or arrangement must be permitted to participate in the meeting unless the Court is satisfied that no member of the relevant class has a genuine economic interest in the company.
In the Bill there is no specific test set out for the Court to apply when approving the RP but I expect that a similar approach might be taken as that for schemes of arrangement namely checking that it has been voted through in accordance with the legislation, those voting in favour were not, for example, receiving ancillary benefits for voting in favour which may have influenced their decision and that the RP is fair.
Statement to be circulated or made available.
Every notice summoning a meeting that is sent to a creditor or member must be accompanied by a statement which must explain the effect of the compromise or arrangement and any material interests of the director of the company and the effect on those interests on the compromise or arrangement in so far as it is different from the effect on the like interests of other persons.
Court sanction for the arrangement
If 75% in value of the creditors or members or classes of each (whichever is relevant) present and voting either in person or by proxy at the meeting agree a compromise or arrangement then the Court may sanction the compromise or arrangement.
Where the Court makes an order in relation to a company that is in administration or is being wound up, the Court may order for the appointment of the administrator or liquidator to cease to have effect, stay or cease all proceedings in the administration or the winding up and impose any requirements with respect to the conduct of the administration or the winding up which the court thinks appropriate for facilitating the compromise or arrangement.
A compromise or arrangement which is sanctioned by the Court is binding on all creditors or the class of creditors or on the members or class of members and on the company but the order will not have any effect until a copy of it has been delivered to the registrar.
Dissenting creditors or members
If there are dissenting creditors or members, or classes of each as relevant, then Court can still sanction the plan if two conditions are met:
- The Court is satisfied that if the compromise or arrangement were to be sanctioned, none of the members of the dissenting class would be any worse off than they would be in the event of the “relevant alternative” (“relevant alternative” means whatever the Court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned).
- The compromise or arrangement has been agreed by a number representing 75% in value of a class of creditors or members, present and voting either in person or by proxy who would receive a payment or have a genuine economic interest in the company, in the event of the relevant alternative.
So this means that where a class does not vote in favour, the Court will still be able to sanction the Restructuring plan provided the class or classes that voted against it are no worse off than they would be in if the compromise were not sanctioned and at least one class of creditor who would receive something if the compromise wasn’t sanction sanctioned has voted in favour.
A couple of observations:
An issue for dispute might be what the “relevant alternative” should be regarded as. If the Court is persuaded that administration or liquidation is the relevant alternative, the threshold for satisfying the “no worse off” test is at risk of being quite low.
The Court has absolute discretion whether to sanction the RP and may refuse to sanction if it is just and equitable to do so. Valuation evidence is likely to play a central role as the company will need to demonstrate where value breaks to exclude creditors or members from voting or participating in the RP as well as to satisfy the Court in the CCCD that the dissenting class members are not worse off.
Termination Clauses in Supply Contracts
The Bill introduces a disapplication of the rights of a supplier to terminate a contract as a result of the company’s insolvency. The policy intention behind the new provisions was to help companies trade through a restructuring or insolvency procedure, and to maximise the opportunity for rescue of the company or the sale of the business as a going concern.
The current law already provides some protection for insolvent companies against certain suppliers who provide essential goods and services (e.g. utilities), but the Bill broadens the scope of these restrictions to a wider range of suppliers.
Clause 12 of the Bill inserts a new Section 233B into the Insolvency Act 1986.
The section applies where a company becomes subject to a relevant insolvency procedure which includes the moratorium under Part A1, a company entering Administration, an administrative receiver being appointed, a VA being approved, a company going into Liquidation, a provisional liquidator being appointment.
Under Section 233B(3) a provision in a contract for the supply of goods or services ceases to have effect when a company becomes subject to an insolvency procedure if under the provision:
- the contract or the supply would terminate because the company becomes subject to the insolvency procedure, or
- the supplier would be entitled to terminate the contract or the supply, or do any other thing, because the company becomes subject to the insolvency procedure.
This effectively means that there will be a prohibition on the reliance by suppliers of termination clauses in contracts for the supply of goods or services that are triggered when a party has entered into a formal insolvency procedure.
The wording “any other thing” is not defined and as far as I am aware, the government explanatory notes provides just one example, which is that changing payment terms will be prohibited. The wording is broad and captures the exercise of any contractual right triggered upon an event of insolvency.
Where under a provision of a contract for the supply of goods or services the supplier is entitled to terminate the contract or the supply because of an event occurring before the start of the insolvency period and the entitlement arose before the start of the insolvency period, the entitlement may not be exercised during the insolvency period.
However, for new breaches which happen after the insolvency procedure begins, suppliers will still be allowed to terminate.
Further, a supplier will be able to terminate a contract if, in the case of the company being in administration or liquidation or if an administrative receiver or provisional liquidator is appointment the office holder consents, or in any other case the company consents or if the Court is satisfied that the continuation of supply would cause the company hardship.
“Hardship” is not defined in the Bill and will undoubtedly need to be resolved the Courts.
What is also built in is provision restricting a supplier from requiring pre-insolvency debts to be paid as a condition of making further supplies.
There will be a new schedule 4ZZA of the Insolvency Act which includes a long list of excluded companies and particular types of contracts, including certain financial institutions and various financial and capital-market contracts. The exclusions capture lending contracts so there is no obligation on lenders to continue to supply finance to companies in a relevant insolvency procedure.
The new provisions will apply where the insolvency procedure commences on or after the day on which the provision comes into force and they will apply in respect of contracts entered into before as well as after that date.
There is temporary exclusion for small suppliers where the insolvency procedure occurs during the “relevant period”, being the date the Bill comes into force until the later of 30 June 2020 or one month after the Bill coming into force.
To qualify as a small supplier where it is not in its first financial year at the relevant time, at least two conditions of the three prescribed conditions need to be met of:
- its turnover must not be more than £10.2 million
- balance sheet total should not more than £5.1m
- and number of employees must not be more than 50.
Where the supplier is in its first financial year at the relevant time, it qualifies as a small entity if at least two of the three prescribed conditions are met:
- supplier’s turnover for each complete month in the first financial year is not more than £850,000
- The aggregate amounts which would be shown in its balance sheet at the relevant time is not more than £5.1 million
- The average number of persons employed by the supplier in the supplier’s first financial year is not more than 50.
The temporary exclusion was likely designed to soften the impact for small businesses in the short term, but once the relevant period has expired (subject to any extension on that time period) it may apply to all suppliers. It will therefore be important that they manage their credit control processes carefully so that they don’t accrue bad debt.
It remains to be seen how these provisions will work in practice and how some of the less precise terms will be interpreted by the Courts. However, given that the Courts’ resources are being stretched and tested may dissuade suppliers from applying to court for permissions for their contracts to be terminated under the hardship exemption perhaps leaving them to try and reach consensual arrangements with the company or officeholders.
Company meetings and filings
The legislation being introduced is to address the difficulties faced by companies as a result of the pandemic when it comes to holding meetings of shareholders and filing documents at Companies House. It will provide companies with more practical options for holding AGMs and other shareholder meetings whilst social distancing measures remain in place across the UK.
The provisions on meetings in the Bill apply to all companies; the flexibility will, therefore, assist not just public companies that must hold an AGM because the Companies Act 2006 requires them to do so but also private companies whose articles of association oblige them to hold an AGM.
The temporary provisions apply to meetings held between 26 March and 30 September 2020 and they can be amended by subsequent regulations to shorten the 30 September 2020 date or extend it by periods of up to 3 months but not beyond 5 April 2021. The provisions are designed to apply retrospectively so that proceedings at meetings held after 26 March may be validated if they would otherwise be in breach of legal requirements and the provisions of the company’s constitution
Under the Bill, all companies which are obliged to hold an AGM within a certain timeframe will have until 30th September 2020 to hold the AGM.
Again, with regard to meetings of shareholders, those meetings do not need to be held in a particular place and may be held by electronic means, the specified quorum does not need to be present in the same place and votes can be cast by electronic or other means. Shareholders will not have the right to attend a meeting in person or participate in any meetings other than to vote during this period.
However, as the legislation will give temporary relaxations only, companies would be advised to review their articles and think about possible amendments they might want to make, such as the ability to hold a hybrid meeting, which will give them more flexibility in the holding of shareholder meetings in future
Companies are required to file prescribed documents by fixed deadlines at Companies House each year and that missing the deadline results in a financial penalty and can result in criminal sanctions for the company’s directors or the company being struck off the register of companies.
Extensions of time have already been offered to companies, the Bill contains measures to extend various statutory deadlines for companies looking to file certain information at Companies House.
Filing of Statutory Accounts
The Bill provides for a temporary extension to the period within which a public company must file its accounts and reports with Companies House, where such accounts are required to be filed between 26 March and 30 September 2020. Under the Bill, a public company may delay filing its annual report and accounts to the earlier of 30 September 2020 or the last day of the period of 12 months immediately following the end of its accounting reference period.
Routine Corporate Filings
The Bill also enables the Secretary of State to make regulations to temporarily extend the deadline for routine filings at Companies House, including for:
- annual confirmation statements;
- to register a legal charge; and
- the period for making certain ‘event-driven’ filings under the Companies Act (notifying a change in directors, a change of registered office or a change to the company’s PSC Register).
If company filing periods are shorter than 21 days, further temporary regulations may be introduced to extend the filing deadline to up to 42 days, and for filing periods between 3 to 9 months, to 12 months.
The Bill provides for such powers to expire by 5 April 2021.