The UK had seen its fair share of challenges in the past. From Brexit, to a tourism industry that took a significant blow due to the Covid-19 Pandemic, the UK – more than any other European country – needed to find a way to get back to some sense of normality.
One of the things that they have done well is that their response to the Pandemic, in terms of the roll out of their Covid-19 vaccination programme, has been good. Football is massive business in the UK and after a season without fans (in the 2020/2021 season), football clubs can start looking forward to addressing their balance sheets. And with the season break (the new season kicks off on August 14), football clubs will be able to look forward to even more fans come the start of the season.
The economic stimulus for distressed companies was good. In the second last article of the series focusing on the info graphic that was supplied by Insol International, we turn our attention to the UK. Our focus will be through the lenses of: legislative reforms impacting on stakeholders dealing with companies in financial distress, and, legislative reforms for companies in financial distress.
Legislative reforms impacting on stakeholders dealing with companies in financial distress
Corporate Insolvency and Governance Act 2020
On 26 June 2020, the UK Government passed into law the Corporate Insolvency and Governance Act (Act), which sets out certain reforms to insolvency law. The reforms are set out below and in section 3.1 on the temporary suspension of wrongful trading.
- Protection of supply contracts. The Act prohibits a company’s suppliers of goods and services from terminating supply contracts purely because that company becomes insolvent. This protection will be triggered in a variety of circumstances, including where the moratorium or restructuring plans (described below) are initiated, and where the company enters administration, liquidation or a Company Voluntary Arrangement (CVA). The policy objective is to maintain the insolvent company’s supply contracts to aid its chances of survival. There are some protections for suppliers which include the following. They will retain the ability to terminate a contract for reasons other than because the counterparty has gone into an insolvency process, and suppliers must be paid for their continued supplies (such that, if a post-insolvency event of default occurs e.g., non-payment, the supplier may then terminate). Suppliers can also be relieved of their obligations if it causes hardship to the supplier’s business; and there is a temporary exception for small company suppliers during the pandemic (with an end date of 31 March 2021). This measure does not apply to certain firms involved in financial services, including insurers, banks and recognised investment exchanges. Also excluded are financial contracts (such as contracts for the provision of financial services), securities financing transactions and derivatives;
- A new moratorium period. The Act introduces a moratorium period which a company (solvent or otherwise) can use for a payment holiday from most of its non-finance pre-moratorium debts and protection from creditor action (including enforcement action) while it seeks a rescue or restructuring (including a CVA, a scheme of arrangement, restructuring plan (described below) or administration). A company in moratorium is protected from legal or enforcement action and forfeiture proceedings by its landlords. In terms of the financial indebtedness excluded from the moratorium, these include insurers, banks, investment firms, parties to capital markets arrangements and other financial services related entities. During the moratorium, directors will retain most of their management powers. However, a monitor, being a licensed insolvency practitioner who will represent creditors’ interests, will supervise the directors by:
- verifying that rescue of the company as a going concern appears likely;
- approving sales of assets outside the ordinary course; and
- approving the grant of new security over assets.
The monitor also has powers to challenge the actions of directors. Once the directors file a statement with the court (by way of an out of court filing) that the company is likely to become unable to pay its debts as they fall due, and the monitor files a declaration that the moratorium will likely result in company rescue, the moratorium commences, lasting for 20 days. This can be extended by a further 20 days within the last 5 business days of the initial period, if the directors file the relevant documents with the court. Any further extension will require the consent of creditors (for extensions of up to 1 year), or otherwise the court. During a moratorium, the company may not obtain credit to the extent of £500 or more from a person unless the person has been informed that a moratorium is in force in relation to the company. Further, the company may, with the permission of the court, dispose of property which is subject to a security interest as if it were not subject to the security interest. Creditors will be able to challenge the actions of directors or monitors if their interests have been unfairly prejudiced. This measure does not apply to certain firms involved in financial services. As specified above, the company must continue to pay these obligations during the moratorium period as they fall due, and the right of a financial services provider to accelerate its claim remains unfettered. This effectively means that the moratorium tool will be of limited use for companies with material financial indebtedness and where their rescue may require delaying payment obligations. Companies (including overseas companies with a sufficient connection to the UK) are eligible to apply for the moratorium;
- A new restructuring plan. In addition to CVAs and schemes of arrangement, the Act sets out a new restructuring plan that companies encountering financial difficulties (whether solvent and insolvent) can use to manage creditors provided the purpose of the compromise or arrangement proposed is to address those financial difficulties. The plan combines features of the existing scheme of arrangement procedure and the US Chapter 11 process. Notably, the plan requires creditors to vote in classes according to the same test as the scheme of arrangement, but it also includes a “cross-class creditor cram down”, meaning that the court can force creditors (whether secured or unsecured) from any class to agree to the plan. For the court to sanction this, it must be satisfied that:
- none of the dissenting class would be any worse off than in the event of the ‘relevant alternative’;
- the compromise or arrangement has been agreed by 75% in value of a class of creditors / members, who would receive a payment or have a genuine economic interest, in the event of the ‘relevant alternative’; and
- it is just and equitable to do so.
Creditors and shareholders will also have the right to apply to court with counterproposals. There have, to date, been four restructuring plans sanctioned: Re Virgin Atlantic Airways Limited [2020] EWHC 2191 (Ch), Re Pizzaexpress Financing 2 Plc [2020] EWHC 2873 (Ch), In the Matter of DeepOcean I UK Limited [2021] EWHC 138 (Ch) and Re Gategroup Guarantee Ltd [2021] EWHC 304 (Ch). Deep Ocean is the first (and so far, only) plan that put to the test the cross class cramdown feature. The court had no difficulty sanctioning the cross class cramdown;
- Suspension of winding up petitions and statutory demands. The Act also includes a temporary ban on filing winding-up petitions and statutory demands forming the basis for a winding up petition from 1 March 2020 until 30 June 2020, where coronavirus has had a “financial effect” on the debtor. This temporary ban has been extended until 31 March 2021. As with the other measures below, this allows businesses more opportunity to reach a fair agreement with creditors. However, a creditor can still file if they have reasonable grounds for believing that (a) coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even without this financial effect. It was envisaged that this prohibition would only be for business landlords, but it has ultimately been proposed so as to apply to all sectors.
Business landlords
As part of the Coronavirus Act 2020, from 26 March 2020 until 30 June 2020, and extended until 31 March 2021, business (and residential) landlords in England and Wales can no longer end a lease and take possession because of rent arrears. However, the accrued arrears and interest will still be payable after this time.
Further, landlords and investors are asked to work collaboratively with high street businesses unable to pay their bills during Covid-19 pandemic.
The government has also enacted the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020, which provide tenants with more breathing space to pay rent by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent. This is counterbalanced in that landlords have an additional 12 months to take control of the tenant’s goods when using the CRAR process.
Employment
With the introduction of a nationwide ‘lockdown’, the UK Government has rolled out a package of temporary support measures to assist businesses through the disruption caused by Covid-19. These include measures targeted specifically at workers – a funded furlough scheme named the Coronavirus Job Retention Scheme (CJRS), additional SSP measures and an income support scheme for the self-employed.
As lockdown measures are eased throughout the UK, following its announcement on 11 May 2020 of its “Plan to Rebuild”,13 the UK Government has announced certain changes to these support measures, which are summarised below.
The courts have held that a contract of employment of employees furloughed before the administration started had been ‘adopted’ by the administrators under paragraph 99(5) of Schedule B1 to the Insolvency Act 1986 (so that payments due to employees have priority over the expenses of the administration, floating charge security and other unsecured debts) in circumstances where:
- The administrators made an application in respect of the employee under the CJRS or paid the employee’s wages after the end of the 14-day period referred to in paragraph 99 [Re Carluccio’s Ltd [2020] EWHC 886 (Ch)].
- The administrators had made payments in accordance with the employee’s contract of employment (including in respect of amounts intended to be the subject of grants under the CJRS [Re Debenhams Retail Ltd [2020] EWCA Civ 600].
Employees who would be made redundant as a result of financial difficulty triggered by the crisis
The CJRS
- This is a temporary scheme open in its current form to all UK employers starting from 1 March 2020, intended to enable employers whose operations have been severely affected by Covid-19 to continue paying part of their employees’ salaries during the crisis period. The CJRS has now been extended until 31 April 2021, with the government reinstating the grant of 80% of the employees’ regular wage, up to a cap of £2,500 per month.
- Employers will be able to furlough employees full time or part time, but for a new employee to be eligible for the grant that employee must have been on a real time information submission made to HMRC before 23:59 on 30 October 2020.
- The scheme takes into account the position of salaried company directors who are furloughed but who may be required to carry out particular duties to fulfil the statutory obligations they owe to the company, and which may otherwise act as a bar to the scheme (as the scheme stipulates that an employee undertakes no work for the company while they are furloughed). In these circumstances, directors are permitted to fulfil the statutory obligations they owe to their company, provided they do no more than would reasonably be judged necessary for those purposes (i.e., they do not carry out their usual duties which would generate revenue for the company). This also applies to salaried individuals who are directors of their own personal service company (PSC).
- Additionally, in the current iteration of the CJRS, directors who have made a RTI Submission between 20 March 2020 and 30 October 2020 are now eligible to participate in the scheme.14
- Directors’ dividends are not taken into account when calculating furlough pay under the CJRS, so any claim in respect of directors who receive part of their remuneration in dividends, will be with respect to their income processed through Pay as You Earn (PAYE) (i.e., their regular wages only).
- There are currently no proposals to change the UK’s redundancy regime as a result of Covid-19. As such, the existing statutory redundancy dismissal regime will continue to apply.
Self-employment Income Support Scheme
The SISS closed to new applications on 29 January 2021. Details about the fourth grant are due to be announced on 3 March 2021.
Delay to the off-payroll working rules (IR35)
Reforms to the off-payroll working rules (also known as IR35) have been delayed by 12 months to 6 April 2021. From 6 April 2021 all public sector clients and medium or large-sized private sector clients will be responsible for deciding a worker’s employment status. The IR35 rules were introduced in 2000 and were designed to tackle tax avoidance via the use of PSCs. The rules aim to ensure that workers providing services through a PSC, or another form of intermediary, pay a fair amount of income tax and National Insurance Contributions (NICs) when they are effectively acting as an employee of the company to which they are providing services.
Employees continuing (wages and other statutory benefits)
SSP
- SSP is currently paid at a flat rate of £95.85 (as of 6 April 2020) for up to 28 weeks. Prior to the new measures described below, SSP would only be paid on the fourth consecutive day that an employee is sick.
- On 13 March 2020, the government extended the Statutory Sick Pay (General) Regulations 1982 (by implementing the Statutory Sick Pay (General) (Coronavirus Amendment) Regulations 2020) (SSP Amendment Regulations) to include those who are self-isolating due to Covid-19. In these circumstances, the employee will be eligible for SSP, and payments will be backdated to 13 March 2020. The employees do not need to have been diagnosed with Covid-19. Rather, under the SSP Amendment Regulations, the entitlement extends to employees that are:
i) ‘isolating [themselves] from other people … to prevent infection or contamination with coronavirus’; and
ii) pursuant to a further amendment on 16 April 2020 as set out in the SSP (Coronavirus Amendment) (No.3), considered “extremely vulnerable” and / or have been “advised [by the appropriate public health body] …to follow rigorously shielding measures”.
- Most recently the SSP Amendment Regulations were further updated on 28 May 2020 by the SSP (Coronavirus Amendment) (No. 4) in response to the introduction of the UK Government’s “track and trace” initiative to confirm that employees who are advised to self-isolate through that initiative will also be eligible for SSP.
- Section 39 of the Coronavirus Act 2020, which received royal assent on 25 March 2020, provides further that the current rules surrounding SSP will be amended with effect from 13 March 2020 such that SSP will be payable from the first day of incapacity (as opposed to the fourth day) if an employee’s incapacity is due to Covid-19.
- In all cases, SSP will only be available to employees who cannot work due to self-isolation. Those working remotely will not be entitled to SSP and should be paid as normal for the work they are doing.
- Employers with fewer than 250 employees as of 28 February 2020 can reclaim up to two weeks’ SSP in respect of any employee (including agency workers and employees on zero-hours contractors) who is eligible for SSP due to Covid-19 through the Coronavirus Statutory Sick Pay Rebate Scheme (CSSPRS). Claims under the CSSPRS can be made here and employers claiming under the CSSPRS must keep certain records in relation to those claims for three years after receipt of payment under the CSSPRS.
- Further guidance surrounding the government’s proposals in respect of SSP, together with additional advice for businesses, can be found here.
Lenders
- Apart from the impact on lenders referred to in sections 1.3 and 1.4 above, in an announcement published by HM Treasury on 3 April 2020, the Chancellor of the Exchequer stated that it is banning lenders ‘from requesting personal guarantees for loans under £250,000’, which previously meant that many borrowers had to use their homes as collateral.15 Furthermore, to ensure that struggling businesses receive their loans as quickly as possible, HM Treasury also announced that it would make ‘operational changes to speed up lending approvals’. However, irrespective of the government’s announcements, as of 24 May, eligible lenders in the UK have only approved 51% of all applications under the CBILS.16.
- In an announcement published by HM Treasury on 3 April 2020, the Chancellor of the Exchequer said he expected banks to support SMEs, including by ensuring interest rates offered are reasonable (bearing in mind cuts to the Bank of England base rate) and passing on the benefit of the government guarantee to those borrowing under the CBILS. In addition, the Bank of England has said it will make more funding available to banks that increase their lending and will provide additional support to banks that offer more lending to SME’s.
- The FCA issued guidance to lenders encouraging them to take a flexible approach to breaches of loan agreements (including covenant breaches) tailored to each customer’s set of circumstances, recognising the differences between ‘normal’ breaches and ‘Covid-19’ breaches, and reiterating the need to treat customers fairly.
Legislative reforms for companies in financial distress
Suspension of wrongful trading
In addition to the reforms to the UK’s insolvency framework referred to in section 2.1 above, the UK Government had proposed a suspension of the law on wrongful trading. Section 214 of the Insolvency Act 1986 currently provides that directors will be personally liable to the company for wrongful trading if they continue to trade when they:
- knew, or ought to have known, that there was no reasonable prospect of their company avoiding insolvency; and
- failed to take every step to minimise the potential loss to creditors.
The government has now announced, by the Act (defined at paragraph 2.1 above) that this law will not be suspended, but instead, from 1 March 2020 until 31 June 2020 (extended until 31 March 2021), there will be a presumption that the directors have not worsened the company’s financial position. This will work to mitigate the penalties that a court may impose on directors. This measure does not apply to certain firms involved in financial services.
Directors should be aware that this suspension is not a panacea – and they may continue to be liable for wrongful trading, as well as breach of their directors’ duties; fraudulent trading; antecedent transactions which put assets beyond the reach of creditors; and misfeasance.
Rescue finance and financial relief
The Government has established a number of rescue finance measures for struggling businesses, outlined in section 1 above.
Administrative measures
In addition, there are some administrative points designed to ease the burden on businesses: specifically, the removal of the need for physical company meetings and an additional three months for companies to file their accounts with Companies House.
Measures for insolvency practitioners
Insolvency practitioners (IPs) will have a greater degree of leniency in meeting certain of their responsibilities – for example, in situations where no serious consequences flow from a missed deadline. Further, IPs will generally be entitled to wait for markets to recover when liquidating assets and, as such, there is no longer an expectation that creditors will be paid within 12 months in members’ voluntary liquidation proceedings. However, the Institute of Chartered Accountants in England and Wales (ICAEW) emphasises the need for robust contingency plans (including the appointment of alternates) to ensure that creditors and estates are not prejudiced and will be carrying out monitoring visits remotely wherever possible.
Separately, as a matter of practice, where a company’s difficulties stem from Covid-19 lockdown, insolvency practitioners may be more minded to give consent to directors to continue to exercise management powers during a company’s administration so that administrators undertake only essential duties and supervise the directors’ attempts to stabilise and rescue the company (a so-called ‘light touch administration’).
HMRC scale-back
HMRC has suspended the majority of insolvency activity for now, unless it is deemed to be essential (i.e., there is suspected fraud or criminal activity).20 However, HMRC will continue to consider CVAs, administrations, individual voluntary arrangements and trust deed proposals.
This temporary insolvency practice direction (TIPD), which expired on 1 October, has been replaced and extended by the revised TIPD which will expire on 31 March 2021, unless revoked or amended during this time.
The full Insol International infographic can be accessed here.