Corporate Insolvency and Governance Act 2020 – New restructuring procedure
On 28 March 2020, the UK Government announced plans to bring forward legislation to introduce new measures to aid restructuring of companies.
As a result, the Corporate Insolvency and Governance Bill was laid in Parliament on 20 May 2020 and this came into force as the Corporate Insolvency and Governance Act 2020 (CIGA 2020) on 26 June 2020.
The overarching objective of CIGA 2020 is to provide businesses with the flexibility and breathing space they need to continue trading and avoid insolvency during this period of economic uncertainty.
A series of articles has been produced looking at the various measures introduced by CIGA 2020. This one focuses on the new restructuring procedure introduced by the legislation.
Territorial extent, effective date and period of operation
This measure extends to the whole of the UK and commenced on 26 June 2020.
This forms a permanent change to legislation.
New restructuring procedure
Schedule 7 of CIGA 2020 introduces a new Part 26A into the Companies Act 2006 (CA06) entitled Arrangements and Reconstructions: Companies in Financial Difficulty.
The new procedure can be accessed by companies that have encountered, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern.
A compromise or arrangement is proposed between the company and its creditors, or any class of them, or its members, or any class of them. The purpose of the compromise or arrangement is to eliminate, reduce, prevent, or mitigate the effects of, any of the company’s financial difficulties.
There are currently two statutory mechanisms for a company to reach a compromise or arrangement with its creditors. An arrangement or reconstruction under Part 26 of CA06 (known as a ‘scheme of arrangement’) and a CVA under Part 1 of the 1986 Act.
CVAs are used by companies looking to restructure, but they cannot affect the rights of secured creditors or preferential creditors without their consent.
The scheme of arrangement framework is highly regarded and has proved a flexible tool in recent years. In addition to use by domestic companies, a number of overseas companies have also used a scheme of arrangement in the UK to effect restructurings, where they have been able to show a “sufficient connection” to the jurisdiction.
The new restructuring plan procedure is intended to broadly follow the process for approving a scheme of arrangement (approval by creditors, sanctioned by the court), but it will also include the ability for a company to bind classes of creditors (and, if appropriate, members) to a plan, even where not all classes have voted in favour of it (known as “cross-class cram-down”). Cross-class cram-down must be sanctioned by the court and will be subject to meeting certain conditions. As long as the eligibility criteria for the new moratorium are met, it will be available to use whilst the company develops a restructuring plan, allowing it to do so free from enforcement action and providing a streamlined restructuring process.
Commonality with schemes of arrangement
Despite the differences between new Part 26A and existing Part 26 of CA06, the overall commonality between the two Parts is expected to enable the courts to draw on the existing body of Part 26 case law where appropriate.
Creditors (and sometimes members) are divided into classes (based on the similarity of their legal rights, which may vary significantly across a company’s creditor base) and each class must vote on the proposed scheme. If all classes vote in favour of the scheme (requiring 75% by value and a majority by number of each class), the court must then decide whether to sanction it.
Not all creditors or members of a company need to be included within a scheme. A company may organise a scheme in such a way as to exclude some creditors or members from it. Those creditors or members who are not bound by the scheme retain their existing rights.
A restructuring plan confirmed by the court will be binding on all affected parties. Parties’ rights following confirmation of a restructuring plan will be as provided for in the plan. Any previous rights will be extinguished by the plan being confirmed by the court.
Interestingly if a company enters an insolvency procedure following the failure of a restructuring plan, the rights and claims of any creditors bound by the failed plan would be as under the plan. By way of example, if a creditor was owed £100,000 before a plan was agreed and retained a debt of £50,000 under the agreed plan, in the event the debtor company subsequently failed and entered formal insolvency, the creditor would only be permitted to claim £50,000 in the insolvency proceedings.
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