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Client Alert-COVID-19: UK GOVERNMENT INTRODUCES “CHAPTER 11”-STYLE MORATORIA TO HELP STRUGGLING UK COMPANIES SURVIVE AND THRIVE

Jul 02, 2020
  • FisherBroyles News

Directors of small and early stage companies – such as those in tech – face personal liability if they continue trading while insolvent: so how do you survive in a time of unprecedented pressure on cash-flow?

Background

Directors, including non-executive directors, owe statutory duties to their company and need to act in its interests (even if they are also the shareholders) – see the excellent summary here on the UK government website.

Entrepreneurial SMEs in the UK have always faced an almost Dickensian threat when trying to survive and thrive: if the company goes under, directors can face personal liability for “wrongful trading”.  This means that if the directors doggedly kept the company going while it was “insolvent”, they can be personally responsible for its debts, under the Insolvency Act 1986.  Apart from anything, intimate knowledge of the tests for insolvency under the 1986 Act is a rare attribute for a director to possess.

Thus, while placating Peter to pay Paul and trying to survive, directors often feel obliged to hand over the whole situation to an insolvency practitioner rather than risk the modern equivalent of the poorhouse, where in fact some breathing space might have been all they needed.

In the light of COVID-19 and the extraordinary life-support the Government has already provided (think furloughing, tax deferrals and loan schemes), it was vital that this existential risk to businesses which should survive to drive our future economy was addressed.

 

Enter the Corporate Insolvency and Governance Act 2020 (CIGA)

To summarise its 245 pages:

CIGA gives struggling but solvent companies a chance of a “moratorium”, essentially a limited stay of execution to give time to find a way to survive by:

  • stopping unpaid creditors from trying to wind the company up or to seize its goods or to crystallise a floating charge or enforce other security;
  • stopping unpaid landlords from forfeiting a lease; and
  • blocking the bringing of most legal proceedings against the company

In return for the company:

  • publicising the moratorium;
  • appointing a “monitor” (more later); and
  • complying with various rules about what it can and cannot do

PROVIDED it is likely that the moratorium will result in the company surviving as a going concern.

 

The CIGA works by inserting new sections into the Insolvency Act 1986, which covers the processes and rules affecting insolvent companies.

Which companies can get a moratorium?

Eligibility is defined by exception: basically, any company is eligible UNLESS:

  • it is already subject to an insolvency procedure (which covers formal proceedings by or against the company in relation to its winding up BUT also voluntary arrangements with creditors), but see below about how companies in respect of which a winding-up petition has been filed; or
  • it falls into a list of particular kinds of companies, mainly relating to financial services – so FinTech companies should be aware of the detailed provisions relating to authorised payment institutions.

The summaries in this note apply to companies in Great Britain and Northern Ireland (but note there are some variations to reflect the different legal systems).  There are slightly different rules for “overseas companies” – companies incorporated outside the United Kingdom but with a presence here.

How does a company get a moratorium?

A company which is NOT subject to a winding up petition can get a moratorium automatically by filing “relevant documents” (see below) at court: and the moratorium takes effect on filing.

If there is a current winding up petition, the company still files the relevant documents BUT the court has discretion to order a moratorium (which comes into effect on the making of the order) or to make any other order.  The court has to judge that the moratorium would benefit the creditors as a whole more than would a winding up.

What are “relevant documents”?

Remarkably straightforward!  The documents are:

  • a notice that the directors want a moratorium
  • a statement by the directors that the company either is, or likely to become, unable to pay its debts
  • statement from an insolvency practitioner that s/he is a “qualified person” – ie an Insolvency Practitioner – and consents to act as monitor
  • confirmation from the monitor that the company is eligible – see above – and that it is his/her view that it’s likely that the moratorium would rescue the company as a going concern.

Note that the “unable to pay its debts” test is very similar to the basic test of insolvency in the rest of the Insolvency Act AND that this is not intended to prop up doomed companies.

Note also that to obtain a moratorium by means of fraud or other dishonest act is a criminal offence. 

What is a “monitor” (and who pays for him/her)?

A monitor is an insolvency practitioner who acts on behalf of the court to monitor the company so as to keep under the review whether the “rescue as a going concern” view is still valid – and, if not, apply to the court to end the moratorium.  There is a statutory obligation on the directors to provide requested information.  Failure to do so can of itself lead to the monitor apply to the High Court to end the moratorium; ultimately the High Court has jurisdiction to issue directions and to remove/replace the monitor.  The monitor him/herself can commit offences if s/he does not carry out his/her duties properly.

The fees and expenses of the monitor are payable by the company: and rate lower in priority than many other debts if the company does go into insolvent liquidation.  Obviously, the monitor will not take on the role unless there is a good chance of getting paid!

What protection does the company get – and for how long?

A high-level summary:

  • creditors: cannot bring insolvency proceedings against the company, cannot enforce any security it has over the company’s assets (whether a fixed or floating charge or both) or repossess or seize it assets
  • landlords: cannot re-enter leased premises on the grounds of non-payment of rent, without applying to the court for permission
  • no-one: can bring legal proceedings against the company, without the court’s consent – with the notable exceptions of employment tribunal proceedings or claims between an employer and a worker (and note the evolving position as regards who is a worker, in the gig-economy)

CIGA makes a distinction between debts and securities which pre-date the moratorium and those arising or created (with the consent of the monitor) during the moratorium, which may be more open to enforcement.

Here’s the bad news: the moratorium only lasts for 20 business days, starting from the business day after it comes into force.  However, it can be extended by application to the court BUT the company has to have been paying the pre-moratorium debts (unless it has a payment holiday) and those relating to the period of the moratorium.

What does the company/monitor need to do – or not to – to comply with the moratorium’s rules?

  • publicity: the company needs to have a statement about the moratorium on its website, at its premises and on all business communications (in hard or soft form)
  • notifications: the monitor has to notify Companies House, the company’s creditors and, in relation to some pension schemes, the appropriate regulator
  • restrictions: the company cannot:
    • obtain more than £500 in credit without notifying the person giving the credit that there is a moratorium
    • grant security over its assets without the monitor’s consent
    • enter into a range of (fairly arcane) contracts relating to stock and other regulated markets
    • pay off debts over a restricted amount without the monitor’s consent
    • dispose of certain property without the monitor’s consent.

It is important to note that breaching these restrictions can lead to criminal liability.

Context and conclusions

We have covered many of the other government schemes and loans in other notes: this new Act is part of that drive to keep viable businesses alive.

Various of the rules relating to filings at Companies House have been relaxed, to recognise the very real problems for directors of companies where day to day survival takes precedence over compliance.

The Corporate Insolvency and Governance Act 2020 is a welcome recognition that these are exceptional circumstances (though changes to our insolvency laws to bring in a more US-style approach have long been mooted).  But considerable though the protections given to companies who need time to regroup are, and simple though the procedures are, the limited duration and the need for constant monitoring still impose financial and strategic burdens on the directors.

 

We’ll keep you posted as to other developments, but if you have any legal concerns about running your business, or protecting your employees we’re here to help.

For additional information, please contact any of the following: Rory Graham at rory.graham@fisherbroyles.com or Peter Finding at peter.finding@fisherbroyles.com with any questions or more specific situations.

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