England: Difficult times call for innovative measures to assist the restructuring of businesses in the UK
On 23 March 2020 Boris Johnson, the UK Prime Minister, announced a UK wide lockdown. Businesses and schools overnight were forced to close or radically change the way in which they operated. There was no way of knowing then how long this would last and few would have imagined that almost six months later the lockdown would only start easing for many businesses, with the guidance of ‘work from home if you can’ changing to encourage workers to return to workplaces and for businesses to adapt to the ‘new normal’.
The impact on the UK economy was dramatic: it is now formally in recession following a drop in GDP of more than 20% in the period April to June 2020. In response to the developing situation, the UK government introduced a number of financial measures and initiatives which, according to the Office for Budgetary Responsibility, will result in the UK government borrowing between £263bn to £391bn in the current financial year (as opposed to the £55bn planned).
The measures to stem a tidal wave of insolvencies in the UK included the Corporate Insolvency and Governance Act 2020 (CIGA 2020) which was laid before Parliament on 20 May 2020 and, after accelerated parliamentary approval, came into force on 26 June 2020.
CIGA 2020 introduced temporary measures to alleviate some of the pressing consequences businesses were facing as a result of COVID-19, as well as introducing significant permanent reforms to the UK’s restructuring and insolvency framework.
The following temporary measures were brought into force but (at the time of writing, and unless extended further) are due to end on 30 September 2020:
- Changes to wrongful trading provisions. Wrongful trading has not been suspended - as has often been misreported - but CIGA 2020 provides that when assessing the contribution directors should make the Court should assume that they are not responsible for any worsening of the financial position between 1 March 2020 and 30 September 2020;
- Prohibition on winding up petitions until 30 September 2020. This applies unless the petitioner can show that the debtor company was not affected by COVID-19 or the reason for the unpaid debt would have arisen regardless of COVID-19. This is ahigh hurdle that has all but stopped the presentation of petitions in this period.
Protection of Supplies
Where a company has entered into an insolvency or restructuring process or obtains the new Moratorium (below) the company’s suppliers of goods or services are unable to terminate, stop supplying or vary the terms with the company if their entitlement to do so arises only as a result of that insolvency/restructuring process.
The company will be required to pay for ongoing supplies but is not required to pay historic liabilities as a condition of supply. This will provide businesses with valuable breathing space to effect a restructuring.
The government has accelerated the introduction of a long-awaited company Moratorium. This gives companies which are likely to be capable of being rescued as a going concern a statutory breathing space of 20 days (with provisions for this to be extended for up to 12 months) in which creditor action is suspended without permission of the Court.
During the Moratorium the directors will retain control of the company while considering rescue or restructuring options. This “debtor in possession” process is a concept familiar in other jurisdictions and its introduction is long overdue in the UK.
Unlike many other jurisdictions it will not be the Court that will oversee this process but instead a licensed insolvency practitioner who will be appointed as a Monitor to independently oversee the Moratorium. The Monitor will provide an objective assessment of whether rescue as a going concern continues to be likely.
The Restructuring Plan, a process that is modelled largely on the UK’s existing Scheme of Arrangement process, is found in the Companies Act 2006 rather than the Insolvency Act 1986. As such, and as a “debtor in possession” process, it is likely to have less stigma and will have obvious attractions to effect a restructuring without a formal insolvency process.
Crucially it can only be used, unlike a Scheme of Arrangement, in circumstances where the company is or may be facing financial circumstances that will affect its ability to continue to trade as a going concern.
As with a Scheme of Arrangement, creditors are divided into classes which each vote on the Restructuring Plan. The distinct advantage of the Restructuring Plan is the ‘cross-class cramdown’: the ability for the Court, much like the US Chapter 11 process, to approve and impose the Restructuring Plan on all classes (including dissenting classes), provided that –
- one of the “in the money” classes approves the Restructuring Plan; and
- the Restructuring Plan delivers a better outcome to the dissenting classes than the “relative alternative”.
What the “relative alternative” might be straightforward. For example if there is simply insufficient cash to continue to trade the relative alternative is likely to be a comparison with either administration or liquidation. However where the cash position is less critical the analysis is likely to be more complex.
This will lead to more scrutiny by the Court of the Restructuring Plan, particularly if there is to be a cross-class cramdown. A detailed financial analysis prepared by either accountants or experienced restructuring professionals will be essential to the success of the Restructuring Plan.
Partner and Head of Restructuring & Insolvency
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