On 28 March 2020, HM Government announced that it will introduce planned reforms to the UK insolvency framework at the earliest opportunity. Lenders and borrowers should familiarise themselves with the reforms and prepare for their implementation.
The government has announced new restructuring tools to enable UK companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency.
The restructuring tools include a temporary moratorium from creditors enforcing their debts against the company, a framework for agreeing a restructuring plan binding on all creditors, and protection of essential supplies to enable companies to continue trading during the moratorium.
In addition to the new restructuring tools, the changes to the insolvency framework will also include the temporary suspension of the wrongful trading provisions to give company directors greater confidence to continue to trade during the Covid-19 pandemic emergency, without the threat of personal liability.
Legislation to introduce these changes is to be introduced in Parliament at the earliest opportunity.
The legislation will implement the plans announced by the government in August 2018 to introduce new insolvency restructuring procedures.
Lenders and borrowers should familiarise themselves with the proposed changes to the framework based on currently available information, monitor legislative developments closely and prepare for scenarios where one or more restructuring tools may be put to use.
The August 2018 BEIS Response is an outline of the government's proposed insolvency reforms, not a draft legislative package. Final legislation will be more detailed than the August 2018 BEIS Response and may differ from the August 2018 BEIS Response in certain respects.
The August 2018 BEIS Response contemplates new rules that would prohibit the enforcement of so called “ipso facto clauses” (i.e. termination clauses) by suppliers in contracts for the supply of goods and services (or under a contractual licence), where the clause allows a contract to be terminated on the basis that a party has entered into formal insolvency proceedings, the new moratorium procedure, or the new restructuring plan procedure.
Consequently, suppliers will have to continue to fulfil their commitments under their contract with the debtor company. However, suppliers would retain the right to terminate a contract on other grounds permitted by the contract including for non-payment.
The BEIS Response states that certain types of financial products and services would be exempt as special cases, although no further details are given. The 28 March government announcement stated that the changes will include "enabling companies to continue buying much-needed supplies, such as energy, raw materials or broadband", suggesting that only certain defined types of supplies may be subject to the prohibition on enforcement of termination rights.
In connection with the suspension of wrongful trading rules, the government announcement of 28 March included the following statement: "Existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct."
Various stakeholders, including the Insolvency Lawyers Association and the City of London Law Society, have expressed broad support for the introduction of a wider range of tools into the UK’s corporate rescue toolbox, whilst at the same time highlighting a number of questions that arise in connection with the August 2018 BEIS Response, including, among others:
Given the government's stated objective to introduce legislation at the earliest available opportunity, there may be little time available to stakeholders to provide feedback on draft legislation, and questions may remain open following adoption of final legislation.
After having been on the legislative backburner for a considerable period of time, the reforms are now set to be enacted on an accelerated basis in an extremely challenging economic environment.
Pending availability of legislation, lenders will need to familiarise themselves with the framework on the basis of the August 2018 BEIS Response and stakeholder commentary, monitor legislative developments closely, anticipate the questions that will arise when restructuring tools are deployed and prepare to engage with borrowers planning to use the new restructuring tools.
New transactions should be structured and documented with the reforms in mind. Borrowers in financial difficulty should consider the extent to which new and existing restructuring tools may be of assistance in their circumstances, where relevant in combination with government measures to support the economy, familiarise themselves with the details of the new restructuring tools, and take professional advice on the implications of the proposed suspension of wrongful trading rules.
We will update this alert as soon as we have more details of the proposed measures.
In the meantime, if you would like to discuss the implications of this alert or changes to the insolvency framework in the context of financing transactions generally, please get in touch with your usual Fieldfisher contact.
Andrew Evans
Charlotte Round
Christian Francis
Dougall Molson
Hannah Rowbotham
Jayne Backett
Matt Hinxman
Michelle Shean
Oliver Abel Smith
Philip Abbott
Richard Gibbard
Robin Spender
Stewart Perry
The government has announced new restructuring tools to enable UK companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency.
The restructuring tools include a temporary moratorium from creditors enforcing their debts against the company, a framework for agreeing a restructuring plan binding on all creditors, and protection of essential supplies to enable companies to continue trading during the moratorium.
In addition to the new restructuring tools, the changes to the insolvency framework will also include the temporary suspension of the wrongful trading provisions to give company directors greater confidence to continue to trade during the Covid-19 pandemic emergency, without the threat of personal liability.
Legislation to introduce these changes is to be introduced in Parliament at the earliest opportunity.
The legislation will implement the plans announced by the government in August 2018 to introduce new insolvency restructuring procedures.
Lenders and borrowers should familiarise themselves with the proposed changes to the framework based on currently available information, monitor legislative developments closely and prepare for scenarios where one or more restructuring tools may be put to use.
About the changes to the UK insolvency framework
The government announcement of 28 March does not provide details of the proposed changes to the insolvency framework, and instead cross-refers to the change to the corporate insolvency regime outlined in the August 2018 publication of the Department for Business, Energy and Industrial Strategy entitled “Response to the Insolvency and Corporate Governance Consultation" (the "August 2018 BEIS Response").The August 2018 BEIS Response is an outline of the government's proposed insolvency reforms, not a draft legislative package. Final legislation will be more detailed than the August 2018 BEIS Response and may differ from the August 2018 BEIS Response in certain respects.
Key features of the proposed moratorium as described in the August 2018 BEIS Response include:
- A company initiating a moratorium cannot already be insolvent but should be in a state of “prospective” insolvency.
- It must be more likely than not that a compromise or arrangement with creditors can be agreed.
- The company needs to be able to meet its current obligations and those incurred during the moratorium as they fall due.
- Directors would remain in control of the company during the moratorium, but a “monitor” (a licensed insolvency practitioner) would be appointed to supervise the moratorium and to protect creditors’ interests.
- The initial moratorium period would be 28 days, extendable for a further 28 days, with further extensions being possible subject to creditor approval.
- The moratorium would affect both secured and unsecured creditors but would not affect the enforceability of financial collateral arrangements.
- Typical outcomes from a moratorium are expected to be that a company agrees an informal restructuring with creditors, or a company enters an insolvency procedure, either a rescue procedure, such as a CVA, or a liquidation procedure.
Key features of the proposed restructuring plan as described in the August 2018 BEIS Response include:
- A company acting through its insolvency officeholders as well as a company acting by its directors would be able to propose a restructuring plan.
- A restructuring plan proposal will be circulated to creditors and shareholders and filed at court.
- There will be a hearing to examine the classes of creditors and shareholders proposed by the company, the formulation of which may be challenged by creditors and shareholders, who may also submit counterproposals.
- If the requisite voting majorities are met and the rules for imposing a cross-class cram down are complied with, the court can decide at its discretion whether to confirm the restructuring plan.
- A plan can be confirmed by the court and become binding on all secured and unsecured creditors even where one or more classes do not vote in favour, provided that at least one class of impaired creditors votes in favour of the restructuring plan.
The August 2018 BEIS Response contemplates new rules that would prohibit the enforcement of so called “ipso facto clauses” (i.e. termination clauses) by suppliers in contracts for the supply of goods and services (or under a contractual licence), where the clause allows a contract to be terminated on the basis that a party has entered into formal insolvency proceedings, the new moratorium procedure, or the new restructuring plan procedure.
Consequently, suppliers will have to continue to fulfil their commitments under their contract with the debtor company. However, suppliers would retain the right to terminate a contract on other grounds permitted by the contract including for non-payment.
The BEIS Response states that certain types of financial products and services would be exempt as special cases, although no further details are given. The 28 March government announcement stated that the changes will include "enabling companies to continue buying much-needed supplies, such as energy, raw materials or broadband", suggesting that only certain defined types of supplies may be subject to the prohibition on enforcement of termination rights.
In connection with the suspension of wrongful trading rules, the government announcement of 28 March included the following statement: "Existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct."
Issues raised in connection with the August 2018 BEIS Response
Various stakeholders, including the Insolvency Lawyers Association and the City of London Law Society, have expressed broad support for the introduction of a wider range of tools into the UK’s corporate rescue toolbox, whilst at the same time highlighting a number of questions that arise in connection with the August 2018 BEIS Response, including, among others:
- what exactly will be the financial tests for entry into and staying under the moratorium?
- to which types of contracts, precisely, will the continuity of supply provisions apply, and what precisely will be the restricted grounds of termination?
- what will the jurisdictional test be for companies wishing to use the restructuring tools (that is, to what extent will they be available to foreign companies)?
- how exactly will the restructuring plan process be conducted, how exactly will voting thresholds be measured, and are creditor protections adequate?
Given the government's stated objective to introduce legislation at the earliest available opportunity, there may be little time available to stakeholders to provide feedback on draft legislation, and questions may remain open following adoption of final legislation.
Implications for Lenders and Borrowers
The proposed reforms to the UK insolvency framework are sweeping and complex.After having been on the legislative backburner for a considerable period of time, the reforms are now set to be enacted on an accelerated basis in an extremely challenging economic environment.
Pending availability of legislation, lenders will need to familiarise themselves with the framework on the basis of the August 2018 BEIS Response and stakeholder commentary, monitor legislative developments closely, anticipate the questions that will arise when restructuring tools are deployed and prepare to engage with borrowers planning to use the new restructuring tools.
New transactions should be structured and documented with the reforms in mind. Borrowers in financial difficulty should consider the extent to which new and existing restructuring tools may be of assistance in their circumstances, where relevant in combination with government measures to support the economy, familiarise themselves with the details of the new restructuring tools, and take professional advice on the implications of the proposed suspension of wrongful trading rules.
We will update this alert as soon as we have more details of the proposed measures.
In the meantime, if you would like to discuss the implications of this alert or changes to the insolvency framework in the context of financing transactions generally, please get in touch with your usual Fieldfisher contact.
Andrew Evans
Charlotte Round
Christian Francis
Dougall Molson
Hannah Rowbotham
Jayne Backett
Matt Hinxman
Michelle Shean
Oliver Abel Smith
Philip Abbott
Richard Gibbard
Robin Spender
Stewart Perry