UK Corporate Insolvency And Governance Bill A Game-Changer

• Published date: 03 June 2020
• Author: Mr David J. Billington, Polina Lyadnova, Jim Ho, Ferdisha Snagg, Adam Machray, Bree Morgan‑Davies, Philip Herbst and Anne Lim
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Coronavirus (COVID-19), Debt Capital Markets, Financial Services, Financial Restructuring, Corporate and Company Law, Directors and Officers, Corporate Governance, Insolvency/Bankruptcy, Financing
• Law Firm: Cleary Gottlieb Steen & Hamilton LLP

On May 20, 2020, the UK government published its highly anticipated Corporate Insolvency and Governance Bill (the "Bill").¹ The Bill is intended to provide businesses with increased flexibility and breathing space to continue trading despite the challenges presented by the coronavirus ("COVID-19") pandemic. The Bill also introduces new corporate restructuring tools to the UK insolvency regime in an effort to maximise distressed companies' chances of survival. While some measures have been introduced specifically to support businesses experiencing financial difficulties as a result of COVID-19, other measures contained in the Bill have been in the making for several years.

Key reforms under the Bill include the introduction of a new restructuring procedure which would allow the court to bind classes of dissenting creditors or shareholders to a restructuring plan, a new stand-alone moratorium process and the temporary and retrospective suspension of wrongful trading rules from March 1, 2020 to June 30, 2020.

While a number of the measures proposed by the Bill will be temporary and are a response to the disruption caused by COVID-19, the new and flexible cross-class cram-down restructuring procedure, in particular, is a potentially game-changing restructuring tool.

The Bill has been laid before the UK parliament and its passage into law is expected to be expedited by way of a fast-track procedure. The second reading of the Bill is scheduled to be held on June 3, 2020.²

I. Cross-Class Cram-Down Scheme

A. Key Features

A new restructuring procedure (a "Cram-Down Scheme")³ will be available to distressed companies which is modelled on the existing scheme of arrangement procedure and contains certain features of the U.S. Chapter 11 proceedings.

Although a company will not need to be insolvent in order to propose a restructuring plan under a Cram-Down Scheme, it is a condition that the company "has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern".

The procedure for a Cram-Down Scheme will largely mirror that of an ordinary scheme of arrangement. The proponent (which, in most cases, is likely to be the company) will put forward a restructuring proposal and apply to the court for the convening hearing. Following the first hearing, the notice of a creditors (or members) meeting and an explanatory statement will be circulated. After the stakeholder classes have voted on the proposed restructuring plan, a second court hearing will be held whereupon the court will decide whether or not to sanction the scheme.

As is the case for the current scheme of arrangement procedure, the Cram-Down Scheme will not automatically benefit from a moratorium or stay.

Courts have been prepared to use their broad case management powers under the English Civil Procedure Rules to impose a de facto moratorium on creditor proceedings while the scheme process is still ongoing. While the courts have stressed there must be special circumstances to grant a stay of proceedings, the courts have accepted that a scheme of arrangement may amount to special circumstances if there is a reasonable prospect of the scheme going ahead. The same approach may be used in the Cram-Down Scheme.

Furthermore, and provided the eligibility criteria for the new moratorium process discussed below are met, companies may also avail themselves of the new free-standing moratorium in conjunction with a Cram-Down Scheme. The utility of such a moratorium remains to be seen, given that the moratorium period is relatively short, the moratorium does not include "contracts for the provision of financial services" (including lending) and creditors may still enforce security over shares that qualify as financial collateral arrangements. Capital markets issuers are also not eligible to apply or file (as appropriate) for the free-standing moratorium. The Bill also includes certain restrictions on companies who have benefited from such a moratorium to then propose a Cram-Down Scheme with respect to moratorium debt or pre-moratorium debt that did not have a payment holiday within 12 weeks after the end of the moratorium (as discussed below in Part II, paragraph A). Given the commonality between the new Cram-Down Scheme and the existing scheme of arrangement procedure, we expect that the courts will continue to draw on the existing body of scheme case law to the extent relevant, including in respect of issues relating to class constitution, third party releases and the insolvency comparator.

At present, for a scheme of arrangement to become effective against the relevant class of scheme creditors or shareholders, at least 75% by value and a majority by number of such class must vote in favour of the scheme (subject to the court sanctioning the scheme). Creditors or members who are not part of the class that is the subject of the scheme are unaffected by it and retain their existing rights.

A Cram-Down Scheme, as currently proposed, will also require the consent of 75% by value in each class of creditors or shareholders and sanction by the court. This remains higher than the two-thirds threshold required under the U.S. Chapter 11 proceedings. However, unlike a scheme of arrangement, there is no requirement for consent of the majority by number of those voting and, most importantly, neither is the failure of one class of creditors to vote in favour of the scheme fatal.⁴ There is also no requirement to obtain the approval of the majority of unconnected creditors by value, which is required under a company voluntary arrangement.⁵

In effect, this will allow the court to bind classes of dissenting creditors or shareholders to a restructuring plan ("cross-class cram-down"), provided that the following two conditions are met. Creditors or shareholders who voted against a proposal but who would be no worse off under the restructuring plan than they would be under the most likely outcome were the restructuring plan not to be agreed (and are thus not financially disadvantaged) cannot necessarily prevent it from proceeding. Cross-class cram-down will only be permitted where at least one class which would receive a payment, or which would have a genuine economic interest in the company in the most likely alternative outcome, has voted in favour of the Cram-Down Scheme. The focus on the most likely alternative outcome will place significant emphasis on the role of the courts in ensuring the appropriate comparator is used for the purposes of determining whether or not a Cram-Down Scheme ought to be approved.

Every creditor or shareholder of the...