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Law360 (December 23, 2020, 5:16 PM EST) --
|Shu Shu Wong|
A number of temporary provisions introduced by CIGA were due to expire on Sept. 30, but due to the ongoing COVID-19 pandemic, some of the temporary measures were extended until Dec. 30 or March 30.
In addition, the restrictions on the use of statutory demands and winding up petitions imposed by CIGA have been extended for a second time to March 31 by a second CIGA extension, which will come into force on Dec. 31.
New Moratorium and Effects
One of the permanent measures introduced by CIGA was a new stand-alone moratorium intended to provide companies with the opportunity to explore options for survival by preventing creditor enforcement action being taken against a company while it considers and implements a rescue.
Directors of an eligible company can obtain a moratorium by filing relevant documents at court in the U.K., unless the company is an overseas company or has a pending winding up petition — in which case, there will need to be a court hearing.
For instance, a company will be eligible if it is incorporated under the Companies Act, the directors state that the company is, or is likely to become, unable to pay its debts, and the monitor (i.e., a licensed insolvency practitioner) is of the view that it is likely a moratorium would result in the rescue of the company as a going concern.
This new moratorium has had a number of significant effects on the U.K.'s insolvency regime and has introduced a series of welcome measures for struggling companies. For instance, there is now a restriction on the enforcement or payment of premoratorium debts, meaning debts that have fallen due before or that fall due during the moratorium and for which there is a payment holiday.
Also, no insolvency proceedings may be commenced against a company during the moratorium period, except that directors may initiate insolvency proceedings if they notify the monitor.
In addition, no proceedings or legal processes may be commenced or continued, unless with the permission of the court, and creditors may not enforce security or repossess goods in a company's possession, except with the leave of the court; notably, floating charges cannot crystallize during the moratorium period, and restrictions cannot be imposed on the disposal of assets.
It is worth noting that in recognition of the extraordinary and temporary difficulties caused by the ongoing COVID-19 pandemic, CIGA also introduced a number of temporary modifications to moratoriums, which have been extended to March 30 by Section 2(2)(b) of the CIGA extension.
These include the relaxation of the normal eligibility criteria to enter into a moratorium (e.g., a company will be eligible even if it has been the subject of a moratorium or an insolvency procedure in the preceding 12 months) and the provision of temporary procedural rules to enable the operation of the moratorium. For instance, companies can use the out-of-court route to obtain a moratorium despite having an outstanding winding-up petition.
Enforceability of Ipso Facto Clauses Under English Law
In order to give companies more breathing space to restructure their operations, including to enter into fresh agreements with key suppliers to the business, CIGA introduced a permanent measure to prohibit suppliers, for instance, from terminating a contract due to the company going into an insolvency process, and applies to all contracts governed by English law for the supply of goods and services.
However, some contracts such as loan agreements and entities such as insurers and deposit-taking banks are excluded from the operation of the section.
A clause which permits a party to a contract to terminate solely on account of an insolvency event affecting the other party is known as an ipso facto clause, and would generally have been enforceable under English law contracts before the entry into force of CIGA.
The provisions of CIGA do not permit a supplier to terminate or "do any other thing," such as amending payment terms, on the commencement of a relevant insolvency procedure where that action is triggered by the insolvency.
However, there are circumstances where a supplier will still be able to enforce a termination right while a company is going through an insolvency process, such as with the consent of the company itself, or if the court is satisfied that the continuation of the contract would cause the supplier hardship and the court grants permission for the termination of the contract.
Furthermore, a supplier will still have the right to terminate or "do any other thing" in relation to any noninsolvency related events contained in the contract that occurs after the commencement of the insolvency procedure. This may include nonpayment and also indirect consequences of the insolvency process (e.g. ,downgraded credit rating), as long as the contractual right to terminate did not arise preinsolvency and was not exercised.
To help support small-business suppliers that are more likely to experience a greater impact from the effects of the COVID-19 pandemic, CIGA included a temporary carveout to exclude small suppliers from the scope of the termination clause measure.
A supplier is small if in its most recent financial year, at least two of the following conditions were met: (1) the supplier's turnover was not more than £10.2 million, (2) the supplier's balance sheet total was not more than £5.1 million and (3) the average number of supplier's employees was not more than 50.
This temporary carveout was due to expire on Sept. 30, 2020, but has been extended to March 30, 2021, by Section 2(2)(a) of the CIGA extension.
New Restructuring Procedure
Furthermore, CIGA introduced another significant permanent measure, a new restructuring procedure to the U.K.'s insolvency regime, which applies to any company liable to be wound up under the Insolvency Act that 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.
Any creditor or member whose rights are affected by the plan must be permitted to participate in the process, but those who have no genuine economic interest in the company may be excluded.
Practically speaking, this provides a company with the ability to propose and agree a restructuring plan with its creditors and/or members for the purpose of eliminating, reducing, preventing or mitigating those financial difficulties. If approved, an application to court for sanction of the plan is made, and the court will assess whether a plan is just and equitable.
One of the most important aspects of this new restructuring procedure is that it has introduced the ability for a plan to be sanctioned by the court even where a class of creditors or members has voted against it.
However, for a court to be able to sanction such a plan, there are a number of conditions that must be satisfied; for instance, members of the dissenting class would need to be no worse off under the plan than they would be in the event of the relevant alternative.
Other Temporary Debtor-Friendly Measures
As a consequence of the restrictions introduced by the U.K. government to curb the spread of COVID-19, such as nationwide lockdowns and the three-tier lockdown system, companies both big and small continue to be faced with a multitude of challenges to stay in business.
In recognition of these unprecedented times, CIGA introduced provisions temporarily preventing certain statutory demands made by creditors being effective and temporarily prohibiting a winding-up petition from being brought against a company on the grounds that it is unable to pay its debts where the inability to pay is the result of the COVID-19 pandemic.
The second CIGA extension extends these restrictions to March 31, 2021, and the provisions apply to any statutory demand or winding up petition served between March 1, 2020, and March 31, 2021, and prevents them from forming the basis of a winding-up petition presented at any point after April 27, 2020.
Significantly, the provisions prohibit a winding-up petition being presented against a company on the basis that it is unable to pay its debts, unless the supplier has reasonable grounds to believe that the inability to pay is not the result of COVID-19.
Similarly, a court should not make a winding-up order unless satisfied that the facts by reference to which the relevant ground applies would have arisen even if COVID-19 had not had a direct financial effect on the company.
In addition, companies and other qualifying bodies with obligations to hold annual general meetings will continue to have the flexibility to hold these meetings virtually until Dec. 30.
CIGA and its extension introduce and extend a number of measures to assist with the rescue of businesses during the ongoing COVID-19 pandemic. They signal a move to a more debtor-friendly restructuring process in the U.K. and provides room for all stakeholders to work together to ensure the survival of the business.
For suppliers, the prohibition on terminating contracts on grounds of insolvency will be of concern going forward and their termination rights on an insolvency will need to be considered very carefully.
Myles Mantle is a partner, Teena Grewal is counsel and Shu Shu Wong is an associate at Haynes and Boone LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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