It does not apply to co-operative societies or community benefit societies, although regulations to apply it to them are expected to become law soon. ACS LLP will issue further information about its application to societies as soon as the necessary regulations become law.
CIGA is designed to give businesses a breathing space during the Covid Crisis and legislates in three main areas:
The most important elements of CIGA will:
1. The moratorium
1.1 The moratorium applies to most companies as well as Limited Liability Partnerships.
1.2 The moratorium is designed to be a breathing space between formal insolvency procedures and the type of crisis that businesses who are struggling may find themselves party to. The directors must state that in their view the company is, or is likely to become, unable to pay its debts and the insolvency Practitioner (“IP”) appointed (known as the Monitor) must be able to state that a moratorium would result in the company being rescued as a going concern. This focus on the business being saved as a ‘going concern’ means it would be more difficult to use the process as a starting point for introducing a ‘Pre-Pack’ sale from Administration.
1.3 It should be noted that provisions differ slightly if the company applying for a moratorium is subject to a winding-up petition.
1.4 A key feature of the moratorium is that the directors of a company keep a measure of control. Whilst having to consult with the IP control is not stripped away, unlike in more formal insolvency procedures.
1.5 The initial period of the moratorium is 20 business days beginning with the day the moratorium came into force. It can be extended for a further 20 business days without creditor consent and for up to a year with creditor consent. Application for an extension can be made by the directors. Extension beyond 40 business days will need creditor consent or a court order.
1.6 The extension of a moratorium can only happen whilst it is in effect, so it cannot be extended if it has ended. Further, there are conditions on extension such as the payment of certain types of debts.
1.7 As with the moratorium in an Administration, there is a payment holiday in relation to creditors. It should, however, be noted that the moratorium is not an automatic shut down for all creditors. Certain so-called “pre-moratorium debts” are excluded from the moratorium. The debts include:
1.8 The main effect on creditors is as follows:
1.9 The Company is also subject to certain restrictions such as having to:
1.10 Given that lenders will still need to be paid it is likely that the moratorium will assist companies with larger trade creditor bases and little in the way of debt funding.
1.11 The moratorium can also be terminated early by the IP in certain circumstances such as being unable to pay moratorium debts that have fallen due or pre-moratorium debts not subject to a payment holiday. The moratorium will also terminate if there is a formal insolvency procedure entered into such as a CVA, scheme of arrangement or a new restructuring plan.
1.12 The directors have obligations to notify the Monitor where there is an extension of the moratorium or it comes to an end.
1.13 The moratorium will also provide a level of priority for certain creditors. If a winding-up petition is presented or winding-up resolution is passed during a 12-week period after the end of a moratorium, Official Receiver fees, moratorium debts and pre-moratorium debts not subject to a payment holiday will have absolute priority over "all other claims" in the administration or liquidation.
2. The new Part 26 Restructuring Plan (“26A Plan”)
2.1 This is a new type of restructuring plan. It will, like other types of plan, apply in a situation where a compromise or arrangement can be reached with creditors. The 26A Plan, therefore, mirrors the provisions of exiting procedures with the added ability to ‘cram down across classes of creditors’, a so-called “Cross Class Cram Down” (“CCCDB”). Without the CCCD, a single class of creditors can block a scheme from being agreed even when it is in the company’s and creditors’ interests. The 26A Plan will bind both secured and unsecured creditors.
2.2 The 26A Plan is only available where the 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. Additionally, the purpose of the plan must be to eliminate, reduce, prevent or mitigate the effect of any of these financial difficulties.
2.3 The 26A Plan differs where a class of creditors vote against the plan. The court can still sanction the plan where:
2.4 A compromise or arrangement sanctioned by the court is binding:
2.5 While it is arguable that a large class of unsecured creditors might be able to force the hand of a dissenting class of secured creditors the plan must still be a fair compromise for the court to sanction it. How such scenarios play out may, therefore, turn on their facts.
3. Termination clauses
3.1 These provisions stop termination clauses that automatically terminate a contract or allow an election to terminate a contract in an insolvency situation.
3.2 The provisions extend further so that a pre-insolvency right to termination cannot be triggered once the insolvency process has been entered into.
3.3 The provisions are not however absolute and such termination clauses can still apply in the following circumstances:
3.4 A supplier can also not demand payment of pre-insolvency charges as a condition of continuing to supply but payment for ongoing supplies must be made. Such a payment is also a condition of a moratorium continuing.
3.5 The proposals do not apply to termination events after an insolvency procedure commences, in that suppliers can be relieved of the requirement to supply by agreement or by the court if it causes hardship to their business.
4. Suspension of wrongful trading liability
4.1 These provisions are temporary and apply with retrospective effect for the period 1st March 2020 – 30th September 2020 (the “Relevant Period”).
4.2 The provisions help directors by providing for a non-rebuttable assumption that the directors are not liable for any worsening of the financial position of the company or its creditors in the Relevant Period. Any deterioration during the Relevant Period does not have to be down to the Covid Crisis.
4.3 Directors must be clear that the provisions do not absolve them from liability under their normal statutory duties to act in the best interests of the Company and its stakeholders. Nor will the provisions stop liability under various provisions of the Insolvency Act 1986 including those relating to fraudulent trading, selling assets at an undervalue or preferences. A director could also be subject to disqualification proceedings if they have acted in breach of the Company Director’s Disqualification Act 1986.
5. Winding-up petitions
5.1 CIGA contains restrictions on the presentational of winding-up petitions in the Relevant Period. For instance, if a winding-up petition is presented during the Relevant Period and after 27th April 2020 and it relies on a Statutory Demand served during the Relevant Period it will not be allowed.
5.2 There are also provisions which state a winding-up petition cannot be served based on a company not being able to pay its debts unless the Covid Crisis is not the reason for the problem. Given the issues arising in the Covid crisis, it would seem this would be a high bar to get over.
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