The Government published the Corporate Governance and Insolvency Bill on Wednesday 20 May. The bill amends the current UK insolvency and company laws to help businesses deal with the impact of coronavirus.
But what are the measures and how will they affect businesses?
Let’s take a look and then explore four key takeaways.
What does the bill propose?
The bill contains eight measures; six on insolvency and two on corporate governance. This is the biggest reform of the insolvency regime for 20 years, and its aim is to increase the flexibility of the current creditor-led insolvency regime.
You can find full details of the Corporate Governance and Insolvency Bill at gov.uk.
We expect these measures to be enacted much sooner than would usually be the case, possibly as soon as the beginning of July.
So here are four important things to know about the bill.
|①||Businesses in distress will get more breathing space
There is currently no freestanding moratorium available for UK companies. By introducing this new moratorium, a solvent or insolvent company in financial distress will be able to get some room to explore its rescue options without creditors taking enforcement action.
It should also encourage early engagement, which maximises the opportunity for rescue and restructure rather than terminal insolvency. The aim is to facilitate a rescue and there are a number of available options to achieve this.
|②||Creditors can be bound to a restructuring plan, even if they vote against it|
One of the rescue options may involve utilising the new restructuring plan procedure, whereby classes of creditors and members can be bound into a restructuring plan even if they have not voted in favour of it, subject to certain conditions and court ratification.
This is different from a Scheme of Arrangement, which the provisions otherwise broadly follow, as are the voting majorities; under the new procedure, 75 per cent by value of a class of creditor or members are required to vote in favour, compared to 75 per cent approval by value and majority by number of each class is needed.
To be eligible, companies will need to have encountered or be likely to encounter financial difficulties, the effect of which can be addressed by the plan.
|③||Protection of supplies and services widened to ‘non-essential’ supplies
Suppliers of good and services will no longer be able to rely on termination clauses unless they have consent of either the company, insolvency practitioner or court. Suppliers must continue to supply goods and services throughout a moratorium or restructuring period, but they must be paid.
The new provisions sit alongside the existing insolvency provisions in relation to essential supplies.
|④||Wrongful trading threat relaxed but not completely suspended|
It was widely expected that there would be a suspension of wrongful trading until the end of June. The bill does not create a blanket suspension, but it does relax the threat of personal liability for directors for wrongful trading during the period 1 March to 30 June.
Our view: welcome changes that will be a big help to businesses
After the pandemic, and for a long time to come, businesses will simply have too much debt to deal with and they will be looking for ways to restructure. So we broadly welcome the measures contained in this bill.
There will undoubtedly be teething issues as there are with all new regimes but having more tools in the insolvency and restructuring box will be a big help to businesses.
We can help
Far too often our first discussions with directors are, ‘If only you had spoken to us sooner.’ The existing regime has often meant mid-market businesses have been reticent to engage with restructuring professionals until it was too late. The new regime is designed to maximise the ability of companies to weather the storm by avoiding formal insolvency.
Our hope is that the option of the new restructuring plan will encourage businesses to engage earlier. History has demonstrated that reacting swiftly to signs of decline maximises your chances of recovery.