On 19 December 2022, the UK Insolvency Service published the "Corporate Insolvency and Governance Act — Final Evaluation Report November 2022," which considers the operation of the permanent measures within the Corporate Insolvency and Governance Act 2020 (CIGA).
By way of recap, the permanent measures in CIGA are:
- Restructuring plans (Part 26A of the Companies Act 2006)
- Moratoriums (Part A1 of the Insolvency Act 1986)
- Restrictions of contractual termination clauses (ipso facto) in the supply of goods and services (s 233B of the Insolvency Act 1986)
For further information, please refer to our article on CIGA published in September 2020.
The report is based on independent research carried out by the University of Wolverhampton. It follows an interim report which was published in June 2022. The interim report was based on in-depth interviews with insolvency practitioners, legal professionals and trade associations. The final report is also based on such interviews and also an on-line survey of insolvency practitioners. The report does not make recommendations, but the Insolvency Service will consider the evidence provided in both reports when writing its Post-Implementation Review, due in June 2023, and will consider what, if any, refinements or changes need to be made, based on the evidence.
The final report finds that:
- Restructuring plans are considered a success and that they satisfy the policy objectives.
- While there are examples of the moratorium having been used successfully, there are several major areas of concern set out in the report.
- The suspension of contractual termination provisions in contracts for the supply of goods and services are considered a valuable rescue tool, however, in practice, suppliers are often able to continue to demand "ransom payments."
Of the three measures, restructuring plans were considered by insolvency practitioners to be the most effective in contributing to the avoidance of job losses in financially distressed companies.
Restructuring plans are considered by stakeholders as a success. They build on the existing 150 years of case law for schemes of arrangement. The cross-class cram down power has been successfully used in cases where a scheme, on its own previously, would have been ineffective.
Another strength of the restructuring plan is the recognised high quality of the English judges adjudicating on the plans. Some responses noted that plans could be considered as too costly and onerous in certain situations, although we would note that a restructuring plan has been successfully implemented for a company in the small and mid-size enterprise (SME) category, and we are aware that further plans for SME businesses are expected to be launched in 2023.
The report noted that, if the cost of challenging a plan is seen as potentially excessive this could impact the policy objective of protecting dissenting creditors. However, is the report considered that the 'inquisitorial' approach of the English courts and the steps taken by English judges to protect the interests of dissenting creditors, even when those creditors were unwilling or unable to appear, was 'perhaps one of the strengths of the measure'. Potential suggested reforms include, in respect of straightforward cases, having a single hearing and/or dealing with the first hearing on paper, assigning the matter to an Insolvency and Companies Court judge (rather than a High Court judge) and allowing multiple debtor entities to be party to the same plan, under a lead company concept. On the basis of existing jurisprudence, multiple debtor filings are not required to restructure the claims of co-obligors through a restructuring plan, but establishing a statutory rather than contractual basis for this may be desirable.
There was also consideration as to whether the creditor consent threshold should be lowered from 75% to 66%, which was in line with other international rescue procedures. The report concluded that "there is support for retaining the 75% voting threshold in restructuring plans", although only 39% of respondents expressed that view, while 49% supported a reduction to a simple majority or two thirds.
Although some respondents clearly viewed these points as important to maintaining the competitiveness of the UK as a jurisdiction, that does not currently appear to a policy objective. Some consideration was given, in that context, to recent legislative reforms in EU jurisdictions, but not (for reasons of timing) to the new draft EU directive.
As we have experienced in practice, the feedback suggests that the policy objectives have not been met. The concerns highlighted include:
- The lack of a payment holiday in respect of financial creditors.
- The concern from insolvency practitioners about reputational risk in acting as a monitor of a company which is not subsequently rescued.
- The alteration of debt priorities and uncertainty as to the debts which would be considered "financial contracts."
The report did not discuss the impact of this first point on the restructuring plan – in practice a restructuring plan cannot be used to cram a dissenting class of secured financial creditors, only a dissenting minority within a class, as those creditors can simply enforce their security.
Furthermore, it was noted that companies which are a party to a capital market arrangement where the company has incurred a debt of at least £10 million are not eligible for a moratorium. This appears to exclude many large companies, mid-market companies, and larger SMEs from using the moratorium. We anticipate that further consideration of this measure will be undertaken in 2023.
Restrictions on Contractual Termination
These powers are generally seen as positive. However, given recent the low level of insolvencies as a result of the UK Government support measures introduced during the COVID-19 pandemic, it is too early to assess fully the impact of the measure. From the experience of survey respondents, there appears to be some uncertainty regarding a supplier's ability to continue to demand additional "ransom" payments. Furthermore, there is also some ambiguity regarding the application of the "hardship provision" which excludes smaller suppliers from the restrictions. As a result of the rising number of insolvencies, we anticipate further use of this measure (along with the other two measures) in 2023.
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