Temporary Changes
First and foremost are a package of temporary provisions:
- Statutory demands served between 1 March and 30 September 2020 are ineffective.
- Creditors who present a petition on other grounds before 30 September must show they have reasonable grounds for believing the pandemic has not had a financial impact on the company or that the grounds would still have existed even if it had.
- For the purposes of wrongful trading, there is an assumption a person is not responsible for the worsening of the financial position of the company between 1 March 2020 and 30 September 2020.
These changes severely restrict creditor rights until at least 30 September 2020. There have been two reported instances of Courts intervening when a creditor was unable to satisfy the new conditions.
New restructure processes
Secondly, the Act brings in two new Insolvency procedures.
Moratorium
A stand-alone moratorium is now available to most companies, designed to give time to consider a rescue plan. The key points are:
- It will last for 20 business days, extendable by a further 20 business days without creditor consent, and up to a year with creditor consent.
- The directors remain in control.
- An insolvency practitioner acts as a monitor who must confirm the moratorium will lead to a rescue of the business, and must terminate it if that is no longer likely.
- No action can be taken in relation to most pre-moratorium debts which will have a payment holiday.
- The company must still pay post-moratorium debts (including wages and post-moratorium supplies).
Most pre-moratorium debts will have a payment holiday, but debts due under a contract for financial services (including lending, factoring, financial leasing or guarantees) do not. The key to the success of a moratorium therefore may well lie with a supportive lender.
Restructure plan
A new restructure plan incorporating a cross-class cram down is also introduced. Similar to a scheme of arrangement, a Court can now sanction a plan which binds a dissenting class of creditors, provided that class would be in no worse position than the most likely alternative.
The removal of ransom creditor classes effectively increases the range of options open to larger and more complex restructures.
Termination clauses
The third change is the restriction on suppliers exercising termination rights.
From now on, unless the company or office holder agrees, a supplier of goods and services to an insolvent company will be unable to:
- Exercise a termination right triggered by insolvency.
- Terminate because of an event occurring pre-insolvency which had not already been exercised by the date of the insolvency without Court permission.
To obtain that a supplier will need to show that continued supply will cause them hardship. Suppliers will also be unable to demand that outstanding sums are paid as a condition of continued supply, effectively stripping key suppliers of ransom status.
Some temporary exclusions exist for smaller suppliers until 30 September 2020. These changes are designed to ensure that the company is able to receive the supplies it needs to maximise the prospect of a rescue.
Summary
The Act has been described as representing the biggest change to the UK’s insolvency and restructuring framework since 2002. There are new tools available, and new restrictions - all designed to maximise the options for a struggling business. Time will tell if the Act achieves this.
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