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UK introduces 20-day moratorium - but still no DIP financing

John Willock, editor of Global Turnaround 

The UK’s long-awaited Corporate Insolvency & Governance Bill prompted by the Covid-19 crisis was finally put before Parliament today, and will come into force in June at the earliest.

The biggest surprise is that the forecast wrongful trading provisions are not the full ‘switch off’ that the market was expecting.

Instead there will only be a temporary suspension, to the end of June 2020, of section 214 Insolvency Act 1986 in relation to wrongful trading, subject to passage of the Bill.

Another novelty is that a much-touted restructuring plan will not require the absolute priority rule, where a junior class cannot recover until a senior class has been paid in full, or even a relative priority rule to be satisfied.

The restructuring plan does however include the expected cram-down element that forces dissenting creditors to accept it, as a long as it is sanctioned by a court as ‘fair and equitable.’ This ‘cross class cram-down’ is widely welcomed by restructuring professionals and insolvency practitioners alike.

Perhaps the biggest disappointment from the 200-page Bill, introduced by the Department for Business, Energy and Industrial Strategy (BEIS), is that there is no DIP financing. Never the less it is understood that the UK’s Insolvency Service may soon be consulting on introducing some form of US-style DIP financing. Lack of access to ‘new money’ in restructurings has become a big problem in the Covid-19 crisis, but a majority of the UK’s traditional senior lending community continue to resist, claiming they rely on remaining at ‘the top of the waterfall’ in order to lend.

A 20-day moratorium

The Bill introduces a 'company moratorium' of 20 business days with an ability to extend for a further 20 business days. There is also the further ability to extend with the consent of creditors or the permission of the court. The moratorium prevents legal action being taken against the company without the permission of a court. To qualify for the moratorium, the company must be unable to pay its debts or likely to become so but still capable of being rescued.  This is a change to the original proposal, which was that companies would have to be solvent to qualify.

Other features of the Bill include:
Protection against winding-up petitions
Companies with unpaid debts are protected from winding-up petitions as a result of the pandemic. Statutory demands issued against companies will be temporarily voided once the legislation is enacted.
Shareholder Meetings
Companies will be allowed to hold shareholder meetings outside the remit of their own constitutions, meaning that "directors will not be exposed to liability for measures that need shareholder endorsement, and shareholders rights are preserved."

That change would be applied retrospectively to meetings held since 26 March, reflecting the number of AGMs whose format has had to be amended because of Covid-19.
Relaxed penalties for late filings
The other principal measure in the bill will cover the legal requirement for companies to make various filings at Companies House by fixed deadlines each year, with a failure to do so triggering a fixed financial penalty. "Companies House has already done all it can under existing law to offer extensions to those deadlines," the BEIS said.

"Over 50,000 companies have taken advantage of this flexibility already, but they may need more.

"The bill allows the Secretary of State temporarily to make further extensions, enabling struggling businesses to focus on the things that matter most while they have reduced resources and restrictions."

Previous guidance from BEIS had indicated only that appeals against late filing penalties would be "treated sympathetically".
Companies House has also temporarily suspended the process under which companies are dissolved for serial failures to meet deadlines.
Jennifer Marshall, a restructuring partner with Allen & Overy who has closely monitored the development of the latest proposals, commented:  “The Bill represents the most significant changes to UK insolvency law since the Enterprise Act in 2003 and possibly since the introduction of the Insolvency Act in 1985 / 1986. 
“It is clearly a mixed bag, with some temporary provisions aimed at assisting companies that are struggling in the Covid-19 crisis, such as the provisions restricting the ability to present winding up petitions and statutory demands and the changes to the wrongful trading laws, but also with some permanent changes such as those relating to the moratorium, the banning of "ipso facto" provisions and the new restructuring plan. 
“Any legislation that adds to the tools in the restructuring toolbox in a time of economic crisis is to be welcomed, and the Insolvency Service is to be commended for having produced this legislation at such short notice. 
“Whether the provisions will really make a difference in practice, though, will depend on the detail, and at over 200 pages, there is a lot of detail to be digested,” said Marshall.

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