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Schedule 9 of the bill provides for a new Part 26A to the Companies Act 2006, and contains provisions that facilitate entering arrangements or reconstructions for a company in financial difficulties.
Although the provisions contain the power to exclude companies providing financial services, at present, Part 26A applies to all companies, including overseas companies, which are liable to be wound up in England and Wales.
A compromise or arrangement under Part 26A is only available where:
(A) The relevant 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
(B) (a) That a compromise or arrangement is proposed between the company and (i) its creditors, or any class of them, or (ii) its members, or any class of them; and (b) The purpose of the compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the said financial difficulties.
On the application of the company, any creditor or member of the company, a liquidator or administrator to the court, the court may order that a meeting of creditors, class of creditors, or the members, or a class of members, be summoned as the court directs.
Subject to points (1) and (2) below, on the application of any of the parties listed above, the court may sanction the compromise or arrangement if a number representing 75% in value of the creditors or class of creditors, or members or class of members, agree the compromise or arrangement.
(1) Where one or more classes dissent, if conditions A and B below are met, the fact that the dissenting class has not agreed the compromise or arrangement will not prevent the court from granting sanction.
Condition A: The court is satisfied that, if sanctioned, none of the dissenting class would be any worse off than they would be in the event of the "relevant alternative" (usually liquidation or administration).
Condition B: That the compromise or arrangement has been agreed by 75% in value of a class of creditors or members, who would receive a payment, or have a genuine economic interest in the company, in the event of the "relevant alternative".
(2) Where an application is made for the court to summon a meeting of creditors/members in respect of a compromise or arrangement before the end of a 12-week period, beginning with the day after the end of any moratorium for the company under Part A1 of the Insolvency Act 1986, and where creditors with whom the compromise or arrangement is being proposed include "relevant creditors", those relevant creditors may not participate in the meeting summoned by the court.
"Relevant creditors" are (a) creditors who are owed a moratorium debt, i.e., generally a debt (other than a debt which accrues as a result of an obligation incurred before the moratorium comes into force) accrued while a moratorium is in place under Part A1 of the Act (section A51 of the bill); and (b) creditors who are owed pre-moratorium debts, i.e., generally debts which accrue as a result of a pre-moratorium obligation, falling due pre- or during the moratorium period, and for which the company has not had a payment holiday.
Comment
Relevant creditors
Notwithstanding that relevant creditors cannot participate in the meeting to sanction the compromise or arrangement, a compromise or arrangement cannot be sanctioned by the court if it includes provisions in respect of relevant creditors and they have not agreed to it.
The effect of this is that relevant creditors have a veto where the compromise or arrangement is proposed within the 12-week period of a moratorium.
Compromises and arrangements
As long as conditions A and B above are satisfied, one class of creditor can impose the compromise or arrangement on all classes of creditor, even dissenting creditor classes.
Cost
The Practice Direction for this process is yet to be written. If it is a repeat of the Scheme of Arrangement process and requirements, it is likely to be too costly for many companies to use.
It is hoped that a streamlined process will be available, even if only for small companies, to allow this new tool to be used to its full potential.
If you have any concerns or questions about the Corporate Insolvency and Governance Bill and its effect on your business, Fieldfisher's restructuring and insolvency team would be happy to assist.