UK Insolvency Service publishes interim report on the effectiveness of measures introduced by the Corporate Insolvency and Governance Act 2020
Published on 22nd Jun 2022
The Insolvency Service is satisfied that the restructuring plan and moratorium processes are broadly meeting their policy objectives – and that ipso facto clauses are likely to be used more in future
On 21 June 2022, the Insolvency Service published an interim report as part of an evaluation into whether three permanent measures introduced under the Corporate Insolvency and Governance Act 2020 (CIGA) are achieving their policy objectives and whether further changes are required.
The measures introduced under CIGA included:
- Restructuring plans – whereby a company formally arranges with its creditors and/or other stakeholders to (among other things) restructure and reschedule certain of its debts and/or inject new capital in order that it may survive as a going concern. The restructuring plan largely follows the process and requirements followed for the longstanding scheme of arrangement process, but with the addition of a cross-class cram down (or, theoretically, cram up) mechanism. The cross-class cram down is designed to bind dissenting classes of creditors who would otherwise have caused the plan to fail (providing such classes are no worse off under the plan than they would be in the "relevant alternative" if the plan were to fail and providing that it has been approved by 75% in value of at least one other class of creditors with a genuine economic interest).
- Moratorium process – a "debtor in possession" process in which the directors of the company remain in control to implement a restructuring or rescue, but with the benefit of a moratorium against certain creditor action for a limited period, initially 20 business days but subject to extension.
- Restrictions on contractual termination provisions (ipso facto clauses) – CIGA also implemented wide-ranging restrictions on the ability to rely on contractual termination provisions for contracts relating to the supply of goods and/or services, where the right to terminate (or the right to do any other thing) arises as a result of a company entering into one of the relevant insolvency procedures. This includes companies entering into administration, liquidation and voluntary arrangements.
Policy objectives achieved
The Insolvency Service is satisfied that the restructuring plan and moratorium processes are achieving their policy objectives, albeit that it considers that targeted changes may be beneficial, including:
- potential simplifications of the restructuring plan procedures to broaden its use by small and medium enterprises (SMEs);
- increasing transparency, disclosure and reducing the costs to enable creditors to better assess and challenge restructuring plans; and
- clarifications to allay concerns within the insolvency industry about changes to priority arrangements in subsequent insolvencies following a moratorium process.
In relation to ipso facto clauses, while the Insolvency Service considers that the change is seen as a positive addition to the insolvency framework, temporary restrictions on enforcement action and government support introduced to counteract the impact of the Covid-19 pandemic on businesses mean that reliance on these clauses has been limited in practice. It believes that these clauses will be more widely used in future.
Findings on restructuring plans
In relation to restructuring plans, the interim report found that the policy objective of addressing the blocking of an otherwise well-supported restructuring proposal by certain creditors has been met. This is largely due to the introduction of the cross-class cram down mechanism, which has now been successfully used in a number of cases and where previously a scheme would have not been implemented.
The volume of case law relating to schemes is seen to have been of great assistance in early cases on restructuring plans. Case law relating to restructuring plans will continue to develop, particularly in relation to the use of the cross-class cram down mechanism. The Insolvency Service considers that the volume of previous case law has particularly assisted in helping practitioners and companies understand what is required of them as part of the new process.
The policy objective of providing adequate protection for dissenting creditors may not have been met in full.
The Insolvency Service considers that this is due to lack of access (or lack of sufficient or timely access) to commercially sensitive information which may otherwise allow these creditors to properly analyse the impact of the restructuring plan and the "relevant alternative" scenario which would be realised were the proposal for a plan to fail. Further protections may include restrictions on voting by connected parties and lowering overall cost by seeking for single joint independent experts to be appointed in relation to valuation evidence.
Restructuring plans are currently seen as too costly and/or time consuming to be used by all sizes of companies, and in particular SMEs.
The Insolvency Service has proposed that certain procedural changes could be made, including condensing the requirement for two court hearings into one hearing for simpler cases with a limited number of classes, to improve the situation. Costs may also reduce over time should standardised documentation for simple cases be introduced, and when more junior counsel can be engaged as the restructuring plan procedure becomes more widely used.
Other matters to be considered following the interim report include:
- Evaluators, such as those used in relation to pre-packaged administration sales to connected parties, having a future role to improve perceived fairness of the procedure without driving up cost.
- The ability to include multiple debtor companies within a single restructuring plan to enable certain obligations across capital structures within complex groups to be dealt with.
- The extra-territorial effect of restructuring plans.
Findings on the moratorium
In relation to the moratorium, the key results and considerations in the report are that the policy objective of providing greater opportunity for company survival is considered to be working, with the moratorium providing sufficient breathing space to allow planning to enable companies to continue as a going concern, or where this has not been possible, to at least consider advice on potential rescue options. The moratorium process has also been coupled with other restructuring processes, such as company voluntary arrangements to provide additional protection.
While there were calls for the initial period of the moratorium to be extended (to 30 business days), the Insolvency Service considers that, on the whole, a 20 business day period provides a sufficient period to consider a rescue plan.
While the costs of the moratorium process appear reasonable and may reduce further in time, the report suggests that amendments could be made to encourage further use beyond SMEs and into larger businesses.
The report finds that some uncertainties remain surrounding the procedure, including the alteration of the usual creditor waterfall by giving certain moratorium debts priority in a subsequent insolvency, and uncertainty surrounding the meaning of "financial services" within the legislation. This has reportedly been dissuading some insolvency practitioners from acting as monitors.
Insolvency practitioners have commented that they are seeing additional regulatory oversight from their regulatory bodies in relation to the reasons why pre-packaged administration sales, rather than the moratorium, are being used. This additional oversight may not have been intended.
The Insolvency Service is considering arguments to extend the category of those qualified to act as monitors of the moratorium processes beyond qualified insolvency practitioners.
Ipso facto clauses
While the Insolvency Service states that the true impact of the ipso facto provisions is yet to be seen due to the previous temporary enforcement restrictions and government financial support during the Covid-19 pandemic, the interim report found that:
- The measure is seen to satisfy the policy objective of preventing companies subject to a relevant insolvency procedure from being "held hostage" by its suppliers. However, an unintended consequence of the legislation may be that suppliers seek to trigger non-insolvency related termination provisions earlier, going against the general "rescue culture" which insolvency legislation seeks to encourage.
- The implementation has encouraged insolvency practitioners to bring communications with suppliers on continued supply arrangements forward so as to be a "Day One matter". The increased certainty over supply arrangements are likely to reduce time and costs of dealing with suppliers going forward.
- There is no evidence as to how the hardship defence (under which a supplier can seek the court's permission to terminate the contract, if it can show that continuation would cause hardship) may work in practice.
- The priority of payment of suppliers under the measure appears likely to deviate depending on the type of insolvency process that has been entered into.
- The Insolvency Service may consider whether a personal guarantee from the insolvency practitioner, such as that which may be requested under the continuation of essential supply provisions in section 233A of the Insolvency Act 1986, would be an appropriate addition to the provisions.
Osborne Clarke comment
While there remains much for the Insolvency Service to consider under its interim report (which is only part of the UK government's commitment to review the measures within three years of implementation), it is clear that restructuring plans, the moratorium process and ipso facto provisions are here to stay. We anticipate, however, that further subtle changes will be made in due course which seek to further the objectives of the legislation.
In relation to restructuring plans, we expect further changes intended to improve the flow of information being provided to creditors and other stakeholders during the restructuring plan process.
There may also be changes to provisions (or encouraged practice) to simplify and reduce the costs of the process to encourage its use by SMEs. However, the flexibility of the process means that standardising documentation will have its limits, while the use of more junior counsel may take some time as case law on the cross-class cram down, in particular, is developed.
On the moratorium process, we anticipate that changes may be more limited to clarification of the existing rules, particularly as the moratorium has yet to be widely used. The potential arguments for extension of the criteria of those qualified to act as monitors beyond insolvency practitioners is an interesting one and will need to be carefully considered for debtors and advisors to have faith that the process is being appropriately handled and does not lead to an increased risk of challenge.
Finally, it is likely that an increasing reliance on the ipso facto provisions following withdrawal of temporary restrictions and government support may lead to a developing body of case law in relation to the "hardship" provisions set out under those measures.