Insolvency legislation endeavours to manage a range of competing interests within society, making it a political and economic battleground, and the procedure aims to maximise the returns to creditors. However, recent reforms have favoured corporate rescue over creditor sympathy. The coronavirus pandemic created an unsympathetic economic environment for companies and forced the hand of lawmakers to enact the Corporate Insolvency and Governance Act 2020 (“CIGA 2020”). Prior to the introduction of CIGA 2020, it was not understood whether the UK’s corporate rescue model was equipped to accommodate these changes in corporate insolvency law. This article will take a look at some of the permanent measures introduced by the Act.
Moratoriums
Before the reforms, there were no automatic moratoriums to protect companies entering into schemes of arrangement, from claims made against them by creditors. In 2013, the High Court held that they could order a stay of proceedings where proposals of a scheme of arrangement were in the process (Bluecrest Mercantile NV v Vietnam Shipbuilding Industry Group [2013]). CIGA 2020 codified a breathing space of circa 20 days, as protection from claims by creditors in the pursuit of debts. This could allow the company to use the moratorium alongside a number of restructuring tools such as company voluntary arrangements (CVAs).
This is only available to eligible companies thus its ability to sufficiently aid distressed companies may be called into question. Directors of the company are not displaced under this procedure, shifting insolvency law away from older, perhaps draconian, attitudes of management displacement previously seen as a by-product of insolvency, moving towards an American-style debtor-in-possession.
Cross-Class Cram-Down Mechanisms
Schemes of arrangement are not typically recognised in insolvency procedures as they involve a solvent company’s reorganisation of share capital by the consolidation of shares of different classes or by the division into shares of different classes. This process incurs high costs due to the required involvement of the courts, and requires 75% of creditors in different classes to agree upon the scheme; without the requisite amount the creditors are not bound by the scheme. CIGA 2020 introduced a cross-class cram down mechanism (CCCD).This effectively operates as an overriding tool on dissenting creditors, for the courts to implement if they assess the creditors are unlikely to be negatively impacted by the implementation of the scheme. The implementation of the CCCD is unassailable as it was not possible to do so under the Insolvency Act 1986 where there is a CVA involving secured or preferential creditors.
Re DeepOcean provided a framework for creditors as to how the courts will use their discretion when deciding whether to use the CCCD mechanism. The DeepOcean Group operates Internationally, as a leading provider of subsea services to offshore industries, forcusing on renewable sectors as well as oil and gas. Seven out of eight classes of creditors approved the DeepOcean group’s restructuring plans. Trower J applied the CCCD mechanism and approved the plans. There were two conditions that needed to be satisfied in order for the opposing creditors to be crammed down. Namely, that the court is satisfied the dissenting creditors would not be worse off by the implantation of the plans, and that the agreement has been approved by 75% of a class of creditors or members who would receive payment or have a genuine economic interest. The CCCD mechanism may become a favourable tool for struggling businesses, given the increase in legal challenges to conditional voluntary arrangements.
The Neutralisation of Ipso-Facto Clauses
The neutralisation of ipso-facto clauses can be regarded as a pro-business reform under section 233B (as inserted into the Insolvency Act 1986). This extends the principle that suppliers must continue to provide services in the event of insolvency proceedings. Subsection 233 and 233A of the Insolvency Act 1986 assisted with the rescue of an insolvent company by trying to preserve the business’s operational capabilities in the context of financial distress but had arguably been used to create ransom situations to put suppliers in a stronger position than creditors.
CIGA 2020 extends the clause to include the entirety of insolvency cases and prohibits suppliers from restricting utilities. However, its application merely applies to supplier contracts and thus it is likely to be limited in practice. Section 233B still excludes schemes of arrangement; the rationale for this is unclear given the similarities between schemes of arrangement and the new restructuring plan. Despite this, for distressed companies, section 233B will be a welcome addition to the insolvency toolkit, when dealing with powerful suppliers to the business; the bargaining power will shift.
The permanent measures introduced by CIGA 2020 show a shift in Insolvency law, favouring corporate rescue over creditor sympathy. This resembles the American Insolvency model, which provides extra support for financially distressed companies and mirrors the approach lawmakers have made with regards to insolvency over COVID-19 and providing pragmatic measures to support companies who face insolvency.
Company Insolvency Pro Bono Scheme 