The Corporate Insolvency and Governance Act 2020 ("CIGA") came into force on 26 June 2020. CIGA was rushed through Parliament at the very height of concerns that businesses faced a devastating economic downturn caused by the Covid-19 pandemic. CIGA has been the biggest change to the insolvency landscape since the Enterprise Act in 2003.
CIGA introduced both permanent and temporary measures. The temporary measures have undoubtedly helped stave off huge numbers of insolvencies. However, given the rush to enact CIGA, it remains open to question just how relevant and useful the permanent measures have proved to be. In particular, as a response to the effects of the pandemic, have the permanent measures been an effective tool?
The Temporary Measures
The most notable CIGA temporary measures were the relaxation of the rules on wrongful trading, suspension of winding up petitions and suspension of enforcement by commercial landlords for unpaid rent.
CIGA did not suspend the rules on wrongful trading, rather it directed the court to assume that the directors were not responsible for any worsening the financial position of the company during the 'relevant period'. The relevant period being between 1 March 2020 and 3 September 2020 and between 26 November 2020 and 30 June 2021. Because the assumption that the directors were not responsible for any worsening position can be rebutted in court, CIGA therefore only reduced (but did not remove) the risk of personal liability to directors who traded insolvently throughout the pandemic. In addition, CIGA made no alteration to the fiduciary duties that directors owe. This particular temporary measure came to an end on 30 June 2021. Accordingly, while a director could still be found liable for wrongful trading within the 'relevant period' or may be pursued for breach of duties, this temporary measure would have given significant comfort to many directors who continued to trade through very difficult times when they easily might otherwise have felt obliged to take insolvency measures.
CIGA restricted creditors from serving statutory demands and petitioning to wind up a company during the pandemic if the debts were Covid-19 related. These restrictions were in place until 30 September 2021. As at the date of this article, creditors may petition for the winding up of a company provided that the debt exceeds £10,000 provided the creditor has given the debtor 21 days to present proposals for repaying the debt. This restrictions on creditor winding up petitions have certainly prevented significant numbers of insolvencies.
CIGA restricted landlords from terminating lease for unpaid rent. Landlords have essentially been left powerless throughout the pandemic as their tenants' arrears of rent continued to accrue. It was estimated by HM Treasury that by March 2022 rent arrears could total around £9bn across the UK. Again, this measure will have been of great assistance to tenants but has of course come at great cost to landlords (and their funders).
The temporary provisions were put in place specifically to prevent the high levels of corporate insolvency that would have been inevitable during the pandemic. The temporary measures would appear to have achieved their planned outcome. However, that outcome has been achieved at great cost to creditors and landlords in particular. For many companies though, the temporary measures will only have delayed the inevitable and we may still see a wave of insolvencies as the temporary measures are removed completely.
The Permanent Measures
The two main permanent measures introduced by CIGA were the moratorium procedure and the new restructuring plan.
The moratorium procedure allows breathing space for a distressed business by allowing a payment holiday in respect of its pre-moratorium debts. Some debts are excluded from the moratorium though and these include wages and salaries and debts or other liabilities arising under a contract involving financial services.
Whilst the debtor is in a moratorium, creditors cannot progress with formal insolvency or other recovery proceedings. So it is clear that the moratorium was intended to allow distressed companies some breathing space in which to explore rescue and restructuring options free from the threat of immediate creditor action.
As at the date of this article we believe that there have been a tiny number of companies that have taken advantage of the moratorium across the whole of the UK. We believe that the number is somewhere less than 30.
It is clear therefore that whatever the merits of the moratorium as a restructuring tool may be, the market is not yet convinced that it is a particularly useful tool (at least at the moment). It might be that the moratorium may only truly find its place in the market once all of the temporary measures have been lifted.
One can obviously see a point in a process that gives a company an opportunity to restructure solvently. By definition, that is going to be of greater benefit for the general body of creditors than any insolvent outcome. But the moratorium process of course does not guarantee a solvent outcome - it only provides an opportunity by keeping creditors at bay for a period. For a moratorium to properly achieve its purpose, something else must simultaneously be going on within the company - e.g. a refinancing, a CVA, a sale of part of the business - something that will positively affect the company's balance sheet, cashflow and/or prospects. If such other restructuring cannot be achieved, then the moratorium is merely delaying the inevitable to the detriment of creditors whose rights are put on hold for the duration of the moratorium.
CIGA created a new form of scheme available to assist distressed companies ("Restructuring Plans"). Restructuring Plans bear some resemblance to schemes of arrangement under the Companies Act 2006. But the big selling point for Restructuring Plans is the ability to compromise classes of debt (including secured debt) against the wishes of those creditor classes. It is therefore possibly a more powerful (or aggressive) restructuring tool than a CVA or a scheme of arrangement.
Since July 2020, Restructuring Plans have been used by some high-profile large companies (such as Virgin Active). However, we have not seen Restructuring Plans being used by smaller companies. And the very simple reason for this is that the costs associated with the implementing a Plan are very high compared to other processes. That is likely to limit their use in the small and mid-market.
Whilst the temporary measures together with massive financial assistance from the Government through loans and the furlough scheme have fulfilled the aim of avoiding large numbers of insolvencies, the permanent measures have been rarely used. Between 26 June 2020 and 31 January 2022, in Scotland, no moratoriums were obtained and only two Scottish companies had a Restructuring Plan registered at Companies House. It is likely that fewer than 100 companies in the whole of the UK have so far used the two regimes. As part of a legislative response to a pandemic affecting tens of thousands of companies, these schemes cannot be counted as a success when only such a tiny number of companies have been able to benefit from them.
Perhaps when winding up restrictions are lifted, we may see greater use of the moratorium but on the other hand, insolvency practitioners are wary of the obligations imposed upon them when acting as a monitor in a moratorium. Restructuring plans are likely always to be unaffordable for the vast majority of companies.
With hindsight, it is easy to be critical but it is difficult to see why it was thought necessary in the summer of 2020 to rush through the legislation for the moratorium and Restructuring Plans alongside the temporary measures. Those new schemes were always unlikely to be an appropriate response to the pandemic for the vast majority of companies. While the temporary measures did their job and were "pandemic-appropriate", the same cannot be said for the permanent measures. It may be the case that the rush to be seen to legislate in the summer of 2020 may have left us with two new schemes of doubtful relevance and offering little or no assistance to most of the businesses in the United Kingdom.
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