Two years on: review of CIGA permanent measures
The Corporate Insolvency and Governance Act 2020 ("CIGA") was the most significant reform to the UK’s corporate restructuring and insolvency regime in a generation. At the time of its enactment in June 2020, the UK Government agreed to evaluate the operation of the three permanent measures introduced by CIGA (the restructuring plan, standalone moratorium, and suspension of ipso facto clauses) within three years. Fulfilling part of this commitment, the Insolvency Service recently published an interim report ("CIGA Report") evaluating the operation and utility of the three permanent measures. We highlight some of the CIGA Report's key findings below. Further information, including the key findings in full, can be found here: Corporate Insolvency and Governance Act 2020 - Interim report March 2022
CIGA Report Findings
- Restructuring Plan ("RP") – Part 26A Companies Act 2006
- Has met the policy objective of addressing the blocking of well-supported restructuring proposals by certain creditors.
- Cram-down power has successfully been used in situations where a Scheme of Arrangement on its own would have been ineffective.
- Considered too costly and time-consuming for use by small and medium enterprises ("SMEs").
- The costs of challenging an RP are seen as excessive and hinder the policy objective of protecting dissenting creditors.
- Without greater disclosure and transparency requirements, the envisaged protection of creditors will be diminished.
- Standalone Moratorium – Part A1 Insolvency Act 1986
- The policy objective of providing greater opportunities for company survival appears to be working.
- The moratorium has successfully been used to provide sufficient breathing space for companies to consider a plan for rescue as a going concern.
- Suitable for SMEs, but eligibility criteria makes it inaccessible for larger corporates (although the criteria could be amended to encourage wider use).
- Some practitioners have not been using the measure as a result of problems arising from the alteration of creditor priority in subsequent formal insolvency proceedings, including the ambiguity over the meaning of "financial services" in the priority of creditor claims.
- Suspension of termination clauses for reasons of counterparty insolvency (so called ipso facto clauses) – Section 233B Insolvency Act 1986
- Lack of evidence on practical operation due to pandemic-related measures materially reducing the number of companies entering formal insolvency procedures.
- Seen to satisfy the policy objective of preventing companies in insolvency procedures being held hostage by suppliers.
- No evidence yet as to how the hardship defence may work in practice.
- Although the measure may not be decisive in many cases, it is likely to reduce fees and time in relation to engaging with suppliers and should help ensure businesses can be turned around and jobs saved.
- Trade credit insurance does not cover continuing supply when a company enters formal insolvency procedure; therefore, suppliers are unlikely to utilise such a product.
Broadly speaking, the permanent CIGA measures have been welcomed by the market and have, by in large, achieved their intended objectives. The RP has become the 'go-to-tool' for debtors where a Scheme is likely to be ineffective, demonstrating the value of cross-class cram-down as a restructuring tool. Furthermore, there is evidence – albeit so far limited – that RPs can be used by SMEs in certain circumstances (e.g., see the RP recently sanctioned by the court in Re Houst Limited (a company with restructuring liabilities of £5.2m) - further information, including our analysis on the judgment, can be found here: SME cram down of HMRC: new developments in the Houst restructuring plan). However, the ability for creditors to challenge RPs is hindered by issues of cost and information disparity (which, critics suggest, remains the case with Schemes notwithstanding the increasing judicial focus on such matters). As anticipated at the time of CIGA's enactment, the moratorium has not been utilised by larger corporates (on the basis they are unlikely to meet the eligibility criteria). We are interested to see if the CIGA Report's findings instigate (further) discussion about changing the criteria to make the tool more widely available. It is also notable that certain practitioners are reported to have avoided using the moratorium due to problems arising from the alteration of creditor priority; this indicates some disquiet in the restructuring community in relation to the operation of this mechanism. Finally, although there have been limited opportunities to date to test the ipso facto provisions (due to the low number of corporate insolvencies over the last c.18 months), this change appears to have been positively received. As we face into to an uncertain economic outlook, this aspect of CIGA (now embedded in s.233B IA 1986) seems likely to be tested more thoroughly over the coming months.
Additional Model Laws: to adopt or not to adopt?
On 7 July 2022, the UK Government (via the Insolvency Service) launched a consultation proposing the implementation into law of two further UNCITRAL Model Laws to supplement the UNCITRAL Model Law on Cross-Border Insolvency (implemented in Great Britain via the Cross-Border Insolvency Regulations 2006 ("CBIR")), specifically:
- the Model Law on Recognition and Enforcement of Insolvency- Related Judgments ("Judgments Model Law") – proposed to be partially implemented through the addition of article X of the Judgments Model Law to the CBIR; and
- the Model Law on Enterprise Group Insolvency ("Enterprise Group Model Law") – proposed to be implemented in full,
(together, the "Additional Model Laws"). Full details of the consultation can be found here: Implementation of two UNCITRAL Model Laws on Insolvency Consultation
What is article X of the Judgments Model Law and why is the UK proposing to adopt it?
- Article X of the Judgments Model Law provides that foreign insolvency-related judgments can (but do not have to) be recognised as a form of relief from the UK courts pursuant to the CBIR.
- The 'full' Judgments Model Law would (broadly speaking) require mandatory recognition of insolvency-related judgments. Therefore, if enacted in full, it would have the effect of setting aside the Rule in Gibbs (a long-established English principle that a contract governed by the law of a particular country can only be compromised or discharged by the courts of that country).
- The UK is prepared to consider partial adoption because courts have previously raised uncertainty as to whether the UNCITRAL Model Law on Cross-Border Insolvency provides for the recognition and enforcement of insolvency-related judgments (as distinct from the recognition of insolvency proceedings). The adoption of article X would clarify the position and offer a new route for recognition of foreign insolvency-related judgments (upon application and at the discretion of the court), where foreign insolvency proceedings had already been recognised.
What is the Enterprise Group Model Law and why is the UK proposing to adopt it?
- The Enterprise Group Model Law has been designed to deal with insolvencies affecting multiple members of the same group and to promote cooperation between courts, insolvency practitioners and other bodies dealing with them – while maximising the value of the group's assets and operations.
- The UK Government is proposing to adopt a tailored version of the Enterprise Group Model Law. Under the proposals, UK courts would have the ability to recognise foreign 'planning proceedings' (essentially, proceedings used to coordinate the management of insolvency between members of the group and associated group insolvency solutions) and an obligation to co-operate with other courts involved in the group's insolvency proceedings.
Whether the UK adopts the Additional Model Laws is yet to be seen, and it will be interesting to see the outcome of the consultation. The adoption of article X of the Judgments Model Law would provide helpful clarity on the scope of relief available under the CBIR. The Enterprise Group Model Law should provide a more structured process for international group restructuring (which can often require value-destructive parallel insolvency processes in different countries) but is likely to be of limited utility unless/until more widely adopted (to date, it has not been adopted by any jurisdictions).
This article was previously published by the authors on the website of Shearman & Sterling