The Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 (the “Act”) implemented a number of key reforms – including a stand-alone moratorium and a new restructuring procedure (a “Part 26A Scheme”) – and certain temporary measures to provide UK businesses with breathing space to continue trading through the disruption caused by COVID-19.[1]

The Part 26A Scheme, while closely modelled on the existing scheme of arrangement procedure (which remains available to debtors), allows the court to bind classes of dissenting creditors or shareholders to a restructuring plan (“cross-class cram-down,” a familiar feature in U.S. Chapter 11 proceedings) if certain conditions are met. While a Part 26A Scheme also requires the consent of 75% by value of shareholders or creditors, unlike a traditional scheme of arrangement, it does not require the consent of a majority by number of those voting, and the failure of one class of creditors to vote in favour of the scheme is not fatal. It also does not require approval by the majority of unconnected creditors by value, which is required under a company voluntary arrangement.

A potential game-changer for UK restructurings, the Part 26A Scheme, was first utilised by Virgin Atlantic Airways and Pizza Express, although the cross-class cram-down tool remains, to date, untested. The Virgin Atlantic Airways restructuring presented another ‘first’ for 2020—being the first time a debtor under a Part 26A restructuring plan applied for a restructuring plan to be recognised as a “foreign main proceeding” under the U.S. Bankruptcy Code.

The new corporate moratorium process under the Act provides protection for a distressed company from certain enforcement actions by creditors for an initial period of 20 business days, provided specified conditions are met. However, companies party to certain capital markets arrangements (for example, those with outstanding bonds) are not eligible for the moratorium. In addition, the exclusion of bank debt and certain other financial obligations of a debtor from the benefit of the moratorium, limits the utility of this reform as such debt, for many companies, represents their most material financial obligations.

The Act also implemented a number of other temporary measures to protect businesses and their management teams, including the suspension of wrongful trading liability for directors, prohibition of statutory demands and winding up petitions, rules preventing suppliers from terminating clauses via so-called ipso facto clauses and extensions of certain corporate filing deadlines. The temporary suspension of wrongful trading rules was renewed on November 26, 2020 and now applies until April 30, 2021. The time lapse between the first and second suspension of this liability (between October 1 to November 25, 2020) will need to be carefully navigated by courts considering wrongful trading actions against directors in the short term.

Other European countries introduced similar reforms to their restructuring frameworks in 2020. In particular, the new German and Dutch restructuring tools (each in force from January 1, 2021) share many similarities with the English scheme of arrangement procedure and also allow for a moratorium and cram-down of dissenting creditors. Although untested, given that such proceedings might receive automatic recognition under the European Insolvency Regulation, there has been some speculation as whether such schemes would be seen as attractive alternatives to English schemes, post-Brexit.

[1] See our alert memorandum: UK Corporate Insolvency and Governance Bill: A Game-Changer?