In 2020 the court rules were changed to require that all residential tenants must be given 14 days’ notice of an eviction. What happens though if the eviction is cancelled on the day?
The Corporate Insolvency and Governance Act 2020 (the “CIGA”) has now received Royal Assent. It applies to most companies as well as Limited Liability Partnerships.
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:
- Corporate Insolvency reform;
- Corporate Governance Provisions; and
- Covid-19 Provisions designed to provide relief for directors and their companies from creditor action on debts due to the Covid Crisis.
The most important elements of CIGA will:
- Introduce a new moratorium to give companies breathing space from their creditors while they seek a rescue;
- Prohibit termination clauses that are triggered on a business entering an insolvency procedure, entering the new moratorium or implementing the new restructuring plan procedure. It will also prevent suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process;
- Introduce a new restructuring plan for companies in financial distress which include new cross class cram down procedures that allow a class of creditors to be bound by the restructuring plan, even if they do not agree to the plan. This provision takes steps to provide safeguards for affected creditors in these situations;
- Temporarily remove the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency;
- Temporarily prohibit creditors from filing statutory demands and winding-up petitions for Covid-19 related debts;
- Temporarily give companies and other bodies greater flexibility to hold Annual General Meetings (AGMs) and other meetings in a safe and practicable manner in response to the pandemic;
- Temporarily ease burdens on businesses by extending filing deadlines at Companies House; and
- Allow for some of the temporary measures to be retrospective, giving immediate support to businesses during Covid-19.
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:
- The monitor's remuneration or expenses;
- Payment for goods or services supplied during the moratorium;
- Rent apportioned to the moratorium period;
- Wages or salary and redundancy payments that have fallen due before or during the moratorium period; and
- Contractual debts or liabilities relating to financial services that have fallen due before or during the moratorium period.
1.8 The main effect on creditors is as follows:
- No petition may be presented for the winding up of the company, except by the directors;
- No resolution may be passed for the voluntary winding up of the company;
- A resolution for the voluntary winding up of the company may be passed only if the resolution is recommended by the directors;
- No order may be made for the winding up of the company, except on a petition by the directors;
- No administration application may be made in respect of the company, except by the directors;
- No notice of intention to appoint an administrator of the company may be filed with the court;
- No administrator of the company may be appointed;
- No administrative receiver of the company may be appointed;
- Landlords cannot forfeit without court permission;
- Security cannot be enforced without court permission;
- No steps may be taken to repossess goods in the company’s possession under any hire-purchase agreement, except with the permission of the court;
- So-called pre-moratorium debts cannot be enforced;
- A floating charge holder cannot apply for crystallisation of its charge.
1.9 The Company is also subject to certain restrictions such as having to:
- Inform a provider of credit of more than £500 that the moratorium exists.
- Get the monitor’s permission for the grant of further security;
- Restrictions on paying pre-moratorium debts.
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:
- On sanctioning, the dissenting class would be worse off under an alternative. The alternative is what the court feels is likely to happen if the plan is not sanctioned. This may well be a low bar given that a company that is may not be able to continue as a going concern is likely to take liquidation as its next step. This is not however guaranteed and is likely to be an area of dispute;
- At least 75% by value of a class of creditor or members, which would receive a payment or have a genuine economic interest if the relevant alternative were pursued, had still voted in favour of the plan. The question here is going to be what a ‘genuine economic interest’ is.
2.4 A compromise or arrangement sanctioned by the court is binding:
- On all creditors or the class of creditors or on the members or class of members (as the case may be); and
- On the company or, in the case of a company in the course of being wound up, the liquidator and contributories of the company.
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:
- An administrator, administrative receiver, liquidator or provisional liquidator appointed over the insolvent company agrees;
- Where the company is subject to a moratorium, CVA or 26A plan, the company agrees; and
- The court grants permission, being satisfied that the continuation of the contract would cause the supplier hardship.
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.
For more information
Contact Adrian Leonard.
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