Coronavirus: proposed amendments to insolvency law

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2 min read

On 28 August 2018, the government published its proposals for the reform of insolvency law including the introduction of two new insolvency procedures and the prohibition of enforcement by suppliers of certain termination clauses.

The government announced on 28 March 2020 that legislation will be introduced at the earliest opportunity to bring these proposals into law.

The purpose of the two new restructuring procedures is to address some of the perceived flaws in the existing restructuring procedures.

New cram down procedure

The process will closely resemble that for the existing scheme of arrangement procedure, which is a mechanism by which a company can agree a compromise with the agreement in effect of 75% by value of its members or creditors, or any class of them. In particular, (1) management stay in control; (2) the company does not have to be insolvent; (3) the persons proposed to be affected by the procedure will be broken down into classes; and (4) there will be two court hearings, the first to examine the class break down and the second to determine whether the relevant requirements for the proposal to take effect have been met.

The main differences from the current scheme procedure are:

  • Creditors or shareholders may submit counterproposals which the court may allow to be put to other creditors and shareholders.
  • Even if a class of creditors does not vote in favour, the court may nonetheless still confirm the plan provided if:
  • at least one class of impaired creditors votes in favour; and
  • any dissenting class of creditors is satisfied in full before any classes junior to that dissenting class receive a distribution under the proposals, a type of priority rule known as “absolute priority”. However, the government has stated its intention that a court may confirm a plan that violates the absolute priority rule where non-compliance is necessary to: (i) achieve the aims of the restructuring; and (ii) is just and equitable in the circumstances.

New moratorium procedure

A new moratorium is proposed for “pre-insolvent” companies that can meet their obligations as they fall due, but will become insolvent if action is not taken.

The new moratorium mirrors the administration moratorium, including preventing secured creditor enforcement and forfeiture by landlords. The initial moratorium period would be 28 days, albeit extensions are possible.

Termination clauses

This entails a prohibition on the enforcement of termination clauses by suppliers in contracts for the supply of goods and services on the ground of insolvency.

However, suppliers will retain the right to terminate on other contractual grounds. Furthermore, only contracts with suppliers are covered not general commercial contracts and a supplier significantly adversely affected by these measures will be able to apply to the court to exercise a right to terminate on grounds of undue financial hardship.

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