Policy background
3 Due to the COVID-19 pandemic, many otherwise economically viable businesses are experiencing significant trading difficulties. In addition, the Government-enforced social distancing measures and reduced resources are making it hard for many businesses to continue to trade and meet their legal duties. This Bill is aimed at ensuring businesses can maximise their chances of survival.
Moratorium
4 There is currently no free-standing moratorium available for UK companies. The policy is to introduce such a moratorium allowing a company in financial distress a breathing space in which to explore its rescue and restructuring options free from creditor action. The moratorium will be overseen by an insolvency practitioner (IP) acting as a monitor although the directors will remain in charge of running the business on a day-to-day basis (known as a ‘debtor-in-possession' process with the company being the ‘debtor’).
5 The aim of the moratorium is to facilitate a rescue of the company, which could be via a company voluntary arrangement (CVA) (a procedure under Part 1 of the Insolvency Act 1986 that enables a company that is in financial difficulty, but not necessarily insolvent, to make a binding compromise and arrangement with its creditors), a restructuring plan (as also introduced by this Bill – see paragraphs 9-16) or simply an injection of new funds. The intention is that the moratorium will result in better, more efficient rescue plans that benefit all of a company’s stakeholders. There will no requirement to have a particular outcome in mind at the time of entry into a moratorium.
6 The objective is to provide a streamlined moratorium procedure that keeps administrative burdens to a minimum, makes the process as quick as possible and does not add disproportionate costs onto struggling businesses.
7 The moratorium will be free-standing. It will not be a gateway to a particular insolvency procedure (or any process at all, if the company can be rescued during the moratorium without needing entry into an insolvency procedure). Possible rescue outcomes include:
● recovery of the company without further action/process;
● sale and/or refinancing outside insolvency;
● CVA under Part 1 of the Insolvency Act 1986;
● scheme of arrangement under Part 26 of the Companies Act 2006;
● implementing a restructuring plan under the new Part 26A of the Companies Act 2006.
8 To ensure the moratorium is only used appropriately, there will be a number of exclusions that mean that a company is not eligible. For example, it cannot have been in a moratorium in the previous 12 months unless the court has ordered otherwise. The company and its proposed monitor must also make a number of statements, regarding the company’s financial state and prospects for rescue, before it can enter a moratorium. The moratorium must be brought to an end if it becomes apparent to the monitor that the company is unlikely to be rescued. The requirements on prospect for rescue, bringing the moratorium to an end, and certain of the exclusions for entry will be temporarily amended to account for the COVID-19 pandemic.
Arrangements and reconstructions for companies in financial difficulty
9 These provisions will allow struggling companies, or their creditors or members, to propose a new restructuring plan proposal between the company and creditors and members. The measures will introduce a "cross-class cram down" feature that will allow dissenting classes of creditors or members to be bound to a restructuring plan. This means that creditors or members who vote against a proposal, but who would be no worse off under the restructuring plan than they would be in the most likely outcome were the restructuring plan not to be agreed (and are thus not financially disadvantaged) cannot prevent it from proceeding.
10 These provisions introduce a new Part 26A into the Companies Act 2006: Arrangements and Reconstructions for Companies in Financial Difficulty (a ’restructuring plan’). The new Part represents the culmination of the policy work undertaken since a restructuring plan procedure for companies was consulted on as part of "A Review of the Corporate Insolvency Framework", published in May 2016. 1
11 There are currently two statutory mechanisms for a company to reach a compromise or arrangement with its creditors; an arrangement or reconstruction under Part 26 of the Companies Act 2006 (known as a ‘scheme of arrangement’) and a CVA under Part 1 of the Insolvency Act 1986.
12 At present CVAs are used by companies looking to restructure, but they cannot affect the rights of secured creditors or preferential creditors without their consent.
13 The scheme of arrangement framework is highly regarded and has proved a flexible tool in recent years. In addition to use by domestic companies, a number of overseas companies have also used a scheme of arrangement in the UK to effect restructurings, where they have been able to show a "sufficient connection" to the jurisdiction.
14 In schemes of arrangement creditors (and sometimes members) are divided into classes (based on the similarity of their rights, which may vary significantly across a company’s creditor base) and each class must vote on the proposed scheme. If all classes vote in favour of the scheme (requiring 75% by value and a majority by number of each class), the court must then decide whether to sanction it. Not all creditors or members of a company need to be included within a scheme. A company may organise a scheme in such a way as to exclude some creditors or members from it. Those creditors or members who are not bound by the scheme retain their existing rights.
15 The new restructuring plan procedure is intended to broadly follow the process for approving a scheme of arrangement (approval by creditors and sanction by the court), but it will additionally include the ability for a company to bind classes of creditors (and, if appropriate, members) to a restructuring plan, even where not all classes have voted in favour of it (known as cross-class cram down). Cross-class cram down must be sanctioned by the court and will be subject to meeting certain conditions. As is the case with Part 26 schemes, the court will always have absolute discretion over whether to sanction a restructuring plan. For example, even if the conditions of cross-class cram down are met, the court may refuse to sanction a restructuring plan on the basis it is not just and equitable. As long as the eligibility criteria for the new moratorium are met, it will also be available (but not mandatory) to use whilst the company develops a restructuring plan providing a streamlined restructuring process and allowing a restructuring plan to be developed free from enforcement action.
16 While there are some differences between the new Part 26A and existing Part 26 (for example the ability to bind dissenting classes of creditors and members), the overall commonality between the two Parts is expected to enable the courts to draw on the existing body of Part 26 case law where appropriate.
Winding-up petitions
17 The Government has introduced measures in the Coronavirus Act 2020 that are intended to support businesses and protect them from the effects of the Coronavirus pandemic, so that those effects do not become permanent. In order to protect businesses from eviction by landlords, the Act created a moratorium on commercial landlords enforcing the forfeiture of leases for unpaid rent. This lasts until 30 June and can be extended if necessary.
18 Following the enactment of these measures the Government has become aware that some landlords have been using other measures, including statutory demands followed by winding-up petitions, to put pressure on their tenants to pay outstanding rent immediately.
19 Although enforcement action of this nature is currently known to be occurring amongst commercial landlords and tenants, any creditor might attempt to use these processes for debt collection purposes.
20 A statutory demand is a possible first step of the insolvency legal process in which a creditor presents a company with a written demand requiring payment of an unpaid debt. Where a statutory demand is unpaid that can be used by the creditor to demonstrate to a court that a company is unable to pay its debts and used as grounds to present a winding-up petition to force the company into liquidation. Insolvency proceedings of this nature are not intended to be used as a tool for debt collection but are to deal with financial failure and tackle companies that are no longer viable. Once a statutory demand has been made, if the outstanding debt is not resolved within three weeks, the company is considered to be unable to pay its debts and winding-up proceedings can ensue. A statutory demand therefore poses a significant threat to the existence of the targeted company.
21 The Government is legislating to temporarily prevent winding-up proceedings being taken on the basis of statutory demands and to temporarily stop winding-up proceedings where COVID-19 has had a financial effect on the company which has caused the grounds for the proceedings.
22 The Bill will prevent any statutory demands made against companies in the period between 1 March 2020 and 30 June 2020 from being used as the basis of a winding-up petition at any point on or after 27 April 2020.
23 The Bill also creates an additional condition that must be satisfied before a creditor can obtain a winding-up order against a company on the grounds that it is unable to pay its debts. During the restriction period, any creditor asking the court to make a winding-up order on those grounds must first demonstrate to the court that the company’s inability to pay its debts was not caused by the coronavirus pandemic.
24 The measure will apply to any winding-up petition presented in the period from 27 April 2020 to 30 June 2020 or one month after the coming into force of this Bill, whichever is the later, and it includes provision to rectify situations where, following the announcement of the measure but in advance of its enactment, a petition has been brought under the pre-existing law.
Wrongful trading
25 Wrongful trading provisions in the Insolvency Act 1986 allow liquidators and administrators, who are office-holders in insolvency procedures, to apply to the court for a declaration that directors of the company in liquidation or administration are liable to personally contribute to the assets of the company. The declaration can be made where the directors allowed the company to continue trading beyond the point at which the insolvency procedure was inevitable, and did not take every step to minimise potential losses to creditors.
26 The threat of a possible future liquidator or administrator making a wrongful trading application is a strong deterrent to directors causing a company to continue to trade where there is a threat of insolvency, even if they intend to take steps to minimise losses to creditors.
27 The current crisis caused by the COVID-19 pandemic means that there is a great deal of uncertainty around trading conditions, both in the immediate and longer term future. Directors are having to make decisions about the future viability of their companies and whether it is appropriate for trading to continue.
28 This measure would mean that, when the court is considering whether to declare a director liable to contribute to a company’s assets under wrongful trading provisions and are considering the amount to be contributed , it will not take into account losses incurred during the period in which businesses were suffering from the impact of the pandemic. The deterrent to continuing to trade during that period will therefore be removed. Certain financial services firms and public-private partnership project companies are excluded from the suspension.
29 The period in question commences from 1 March 2020 and ends on 30 June 2020 or one month after the provision comes into force, whichever is the later, so the measure is retrospective. However, in the event that the impact of the pandemic on businesses continues beyond the end of that period, it may be extended for up to six months using secondary legislation, and that process may be repeated, extending the suspension period further. If it is clear that the pandemic is no longer having an impact on businesses, the period of suspension may also be ended. Such extension and ending of the period will be through regulations contained in a statutory instrument (SI).
30 The objective of this measure is to remove the deterrent of a possible future wrongful trading application so that directors of companies which are impacted by the pandemic may make decisions about the future of the company without the threat of becoming liable to personally contribute to the company’s assets if it later goes into liquidation or administration. This will in turn help to prevent businesses, which would be viable but for the impact of the pandemic, from closing.
Termination clauses in supply contracts
31 When a company enters a rescue, restructuring or insolvency procedure, suppliers often stop supplying it under a contractual termination clause triggered by insolvency. This measure will prohibit termination clauses that engage on insolvency or are based on past breaches of contract. This will mean that (subject to certain exclusions) contracted suppliers will have to continue to supply, even where there are pre-insolvency arrears.
32 The Bill will introduce new additional provisions to existing provisions in the Insolvency Act 1986 to widen the scope of the restrictions on termination clauses in contracts. This will prevent a much wider range of suppliers from terminating a contract due to a company entering a formal restructuring or insolvency procedure. The policy intention is to help companies trade through a restructuring or insolvency procedure, maximising the opportunities for rescue of the company or the sale of its business as a going concern. The measures will complement the policy for a new moratorium and restructuring plan procedure, which are aimed at enhancing the rescue opportunities for financially distressed companies.
33 The current law under sections 233 and 233A of the Insolvency Act 1986 makes limited provision to invalidate termination clauses, in certain company insolvency and rescue procedures and in relation to specific supplies.
34 The new provisions will prevent suppliers of a much wider range of supplies relying on termination clauses or doing ‘any other thing’, due to a company entering a qualifying restructuring or insolvency procedure. A new Schedule provides for the companies and services which are excluded from the provisions. They are predominantly financial services and essential services covered by pre-existing provisions of the Insolvency Act 1986. Where a contract for the supply of goods or services contains a termination clause or allows for any other thing (such as changing payment terms) to happen, this will cease to have effect under the new provisions. Where an event permitting the exercise of the right occurred before the restructuring or insolvency procedure commenced but the supplier had not exercised the right to terminate before the restructuring or insolvency event, the supplier will be unable to exercise it for the duration of the insolvency process. Suppliers will be prohibited from making payment of outstanding charges a condition of continued supply. Procedures to which this provision applies include the new moratorium and restructuring plan.
35 Where the new provision applies, it will not be a requirement for the office-holder, or directors to provide a personal guarantee.
36 Small entities as defined, will be exempted from the provisions, as a time limited COVID-19 related measure. This exemption will be in place from the Bill being enacted and coming in to force and a month thereafter or 30 June 2020 whichever is later, with a power to reduce or extend this period. Where a company enters into an insolvency process after the exemption expires, entities of all sizes which supply the company will be bound by the provisions unless otherwise exempted.
37 There are safeguards for suppliers in that they can apply to the court for permission to terminate the contract on the grounds of hardship. A contract can also be terminated with agreement from the company (where the company has entered a moratorium, voluntary arrangement or restructuring plan) or the office-holder (in any other relevant procedure).
38 The intention behind the provisions is to maintain supplies of all goods and services to companies in restructuring and insolvency procedures by limiting the circumstances in which the supplier can terminate or alter the contract. This will help companies trade through a restructuring or insolvency process, thereby maximising the opportunities for the rescue of the company or the sale of its business as a going concern.
Power to amend corporate insolvency or governance legislation
39 This measure will create a time limited provision allowing the Secretary of State to temporarily amend corporate insolvency and related legislation through regulations made by statutory instrument (SI). Amendments made under the power contained within this provision may be made to both primary and secondary legislation (falling within the definition of "corporate insolvency or governance legislation"). Providing for temporary legislative change in this way will mean that the insolvency and business rescue regime may quickly react and adapt to deal with significant and potentially unexpected future challenges presented by the impact of the COVID-19 pandemic on business.
40 Temporary amendments to legislation may be framed to give protection to companies which would be viable but for the effect of the pandemic, and to provide the regulatory support needed for their survival rather than being forced to enter insolvency proceedings. Changes may also allow for a temporary increase in flexibility in provisions within corporate insolvency and restructuring processes. This could be to mitigate the increased difficulty in adhering to those processes, such as meeting time limits, which may be caused by the impact of the pandemic. The provision could also be used to make temporary amendments to the insolvency related enforcement regime, to ensure that it remains fair and workable in the face of the impact of the pandemic on business.
41 There are currently no specific plans to use the power contained within this provision, but as the full extent of the impact of the pandemic on business becomes clear, it could be exercised to make urgent preventative or mitigative amendments. Any changes made by the use of the power in this provision must be kept under review by the Secretary of State and revoked if no longer needed or revised to take account of changing circumstances.
42 The power contained in this provision is wide-ranging, but has some significant restrictions.
● The impact of any proposed amendments on any person (such as a creditor or employee) likely to be affected by them must first be considered.
● The temporary amendments made must be proportionate to the challenges presented.
● The effect of the amendment could not practicably be achieved without legislative change.
● The provision may not be used where the proposed amendment could be made using existing provisions whilst still achieving the objective of legislating sufficiently quickly.
43 In addition, amendments made under this provision may not create a criminal offence or a civil penalty, though they may modify the circumstances under which a person is guilty of an existing offence or civil sanction. The provision may not be used to create or increase a fee.
44 An SI containing regulations to temporarily amend legislation under this provision would be subject to a "made affirmative" process, which means that the changes will be effective immediately upon the SI being made. This is necessary because the need for temporary amendments is in most cases likely to be pressing, and the time delay in seeking approval by both Houses of Parliament in the normal way could have a detrimental effect. The SI is however required to be laid as soon as possible after being made, and will require approval by both Houses within 40 sitting days, or the change will cease.
45 Temporary changes made in this way may last for a maximum of 6 months, but can be extended using a similar "made affirmative" process. The temporary changes may also be curtailed through an SI subject to a negative resolution process and they must be revoked or amended, if it is clear that the impact of the pandemic has eased sufficiently.
46 This provision to make temporary changes will itself expire on 30 April 2021, but may be extended after that date if the impact of the pandemic is still being felt by business. Such an extension would be through an SI subject to the normal affirmative procedure.
Meetings and filing requirements
Meetings of companies and other bodies
47 A company may be required by legislation or its constitution to take certain key decisions by passing a resolution of the members of the company (for example, a change to the company’s articles of association). Public companies can only pass a resolution of the members by holding a general meeting (section 281 of the Companies Act 2006 ("the CA 2006")), and other companies may be required to do so as a consequence of their articles.
48 Members also have the right to require directors to call a general meeting (section 303, CA 2006). Public companies and certain private companies have a statutory duty to hold an annual general meeting ("AGM") within a specified period and failure to comply is a criminal offence (section 336, CA 2006). Mutual societies (including registered branches of friendly societies) and charitable incorporated organisations may also be required to hold an AGM or other meetings by legislation or their own constitution or rules.
49 The constitution or rules of companies and other bodies may also require that AGMs and other meetings are held in a particular way. For example, it may be required that meetings be held in person or at a particular place. The Government has introduced temporary emergency measures across the UK which require certain businesses to close, which prevent anyone leaving the place where they live without reasonable excuse and which ban public gatherings of more than two people. These emergency restrictions have been put in place to limit the spread of COVID-19 but may have prevented, and may continue to prevent, companies and other bodies from being able to hold AGMs at the time required by, and in a manner consistent with, legislation or their constitutional arrangements.
50 These measures are intended to introduce temporary relaxations to enable companies and other bodies to hold AGMs and other meetings in a manner that is consistent with their constitutional arrangements and the need to limit the spread of COVID-19. During the temporary period in which these measures are in force, companies and other bodies will be given greater flexibility as to the manner in which such meetings are held. For example, they will be able hold meetings, and allow votes to be cast, by electronic means.
51 The measures also make provision to extend the period within which companies and other bodies must hold an AGM, in order to offer further flexibility if required. Those bodies with a deadline for holding an AGM expiring between 26 March 2020 and 30 September 2020 will be given until 30 September to hold their AGM, taking advantage of the more flexible arrangements for holding such meetings which are introduced by this Bill. There is also a power to provide for further temporary extensions of any deadlines for holding an AGM.
52 These measures will only apply in respect of a temporary period which begins on 26 March 2020 and runs until the end of September. There is a power to extend that period by up to three months at a time, but the temporary period cannot be extended beyond the end of the current financial year.
Extension of filing deadlines
53 This Bill provides the Secretary of State with a power to make regulations to extend deadlines for certain filings which include: accounts, under Part 15 of the Companies Act 2006; annual confirmation statements under Part 24 of that Act; notices of related relevant events under that Act; and registration of charges under Part 25 of that Act.
54 The Secretary of State has a discretion to extend the period for filing accounts under section 442(5) of the Companies Act 2006 if there is a "special reason" and upon an application being made. During the period affected by COVID-19, demand for this type of extension has substantially increased.
55 The power in clause 37 is broader than the discretion to extend the deadline for the filing of accounts upon application because it gives the Secretary of State a power to extend the deadlines for the various filing requirements listed in clause 38.
56 If a deadline is extended using the power in clause 37, it will apply to all relevant companies (which may include other entities, for example, Limited Liability Partnerships) without them needing to apply for the extension. There are maximum periods that may be provided in respect of each extended deadline.