Cast your mind back to Christmas 2019, when the possibility of a pandemic was first being mooted. Remember that discussion with Auntie whilst staring at the neglected poinsettia? The wizards of Whitehall and national Think Tanks were already busy modelling scenarios and projecting outcomes if the ‘pneumonia outbreak of unknown origin’ spread west. Auntie certainly didn’t need to be versed in Plato or Machiavelli to grasp the social and economic pandemonium a pandemic could bring. Five months later, the Corporate Insolvency and Governance Act 2020 (CIGA) gained its first reading in the House of Commons, courtesy of Alok Sharma MP and Lord Callanan in the Upper House. If you’re thinking of instructing a debt collector but are not sure if CIGA is relevant, this article is for you.
Why is CIGA Needed?
Politicians from both sides of the house and business owners from every corner of commerce were concerned the pandemic would cause swathes of businesses to fail. High unemployment through the recession has social and economic consequences. In times of prosperity debt collectors help maintain the status quo. In times of adversity, they help repatriate money to creditors who need it most. Whilst schemes like Coronavirus Job Retention and Business Interruption Loans provided significant help, they were not a cure for all ills. CIGA was intended to support creditors, debtors, directors and investors.
What did CIGA Change?
CIGA brought in temporary and permanent amendments to the Insolvency Act 1986 and the Companies Act 2006, which were geared to preserving businesses that were worst hit by the ensuing recession. It also introduced tools to help businesses restructure and recover. CIGA brought in the following changes:
1) Moratoriums. Defined as the prohibition or suspension of an activity that had previously been allowed. In a similar light to The Debt Respite Scheme Regulations 2020, where consumers can suspend creditor action (Breathing Space) for 30 – 60 days, CIGA provides respite to companies at imminent risk of insolvency. When initiated, it neutralises the threat of court proceedings. Creditors and debt collection agencies alike are required to suspend action. The debtor must provide proof that a Breathing Space is being declared and overseen by an insolvency practitioner (IP). Restructuring a business or finding investors within 20 business days is not always achievable. Debt recovery firms such as Advocate are seeing IPs renew the moratorium. The relatively low cost of instigating one encourages directors to save their business without leaving suppliers behind. Debts incurred during a moratorium will be given preference in the event the company enters liquidation within 12 weeks of the Breathing Space ending. Moratoriums are now a permanent feature of the Insolvency Act 1986.
2) Restructuring. The word restructuring can send shivers down the spine of creditors, shareholders and employees, conjuring up images of a company on the precipice of insolvency. Restructuring is nothing new for the Companies Act 2006. CIGA gives directors and IPs a nearly blank canvas on how creditors and shareholders are accommodated in the restructuring proposal. CIGA empowers a judge to overrule the creditor vote, dubbed a cross-class cram down (CCCD). This means creditors could be bound to accept a restructuring plan they have already rejected. While Virgin Atlantic Airways and Pizza Express were the first two companies entering the restructuring made possible by CIGA, OceanGroup obtained the first CCCD. Restructuring in this way is not solely born out of the pandemic. Prior to 2020, the UK government had intended to introduce a bill loosely styled on the American legislation of 1978 known as Chapter 11 of the Bankruptcy Reform Act. Restructuring is now a permanent addition to the Companies Act 2006 and can be used in tandem with CIGA Moratoriums.
3) Connected Party Sale. There are times when directors buy their business out of administration for the greater good. The pandemic presented an opportunity to abuse that right, unjustly leaving scores of creditors behind. CIGA brought third-party validation. When faced with a connected party offer for some or all of the company assets, administrators were compelled to obtain an independent written opinion. If the offer was received more than eight weeks after entering administration, no such opinion was required as ample opportunity had lapsed for other unconnected offers. This was a temporary measure introduced through CIGA.
4) Protection of Supplies. With the exception of IT providers, communications and utilities, the Insolvency Act 1986 did not prevent suppliers from withdrawing goods/services from debtors entering insolvency measures such as Administration or proposing a CVA (company voluntary arrangement). Terminating the contract and withdrawing supply has long been a common mechanism for creditors to protect themselves from further exposure. Any business deprived of obtaining goods/services necessary to generate income has little chance of survival. CIGA amended the Insolvency Act 1986 to create an obligation to supply whilst the debtor has a breathing space or is being restructured. Thankfully, there are exceptions for certain industries or creditors where a continued supply will jeopardise their own solvency. Protection of Supplies is now a permanent addition to the Insolvency Act 1986 and can be used in tandem with CIGA Moratoriums and Restructuring.
5) Wrongful Trading. Under Section 214 of the Insolvency Act 1986, directors face a degree of liability if they have knowingly or should have known the company was trading whilst insolvent. Prosecution beckons for any director deemed liable for trading their company into a worse position. When a company becomes insolvent, the chance of a successful debt recovery diminishes. CIGA temporarily suspended this liability at the height of the pandemic and could be brought back in if the UK enters another lockdown.
6) Statutory Reporting. At the height of the pandemic, temporary measures were brought in so that annual accounts could be filed late without penalty or fear of striking off. CIGA also allowed Annual General Meetings (AGM) to be adapted and held in a Covid-safe manner. It lifted the requirement for AGMs to be held in line with a company’s constitution and negated director penalties for non-compliance.
7) Winding Up Petitions. Expecting a rush of winding up petitions in view of the first lockdown, a reprieve was needed for vulnerable businesses. CIGA prevented a creditor from presenting a winding-up petition if the debtor’s financial hardship was directly attributed to the pandemic. This temporary legislation was superseded on 01 October 2021 as part of a gradual return to normal trading conditions. Under CIGA, insolvency practitioners are now obliged to consider the financial impacts of the pandemic when deciding whether a business is viable. A sharp decline in revenue is no longer a death knell if attributable to the pandemic. In the period to 31 March 2022, the winding-up petition threshold has been raised to £10,000 with a three-week window instead of the usual one week. Incidentally, HMRC issues 50-60% of all winding-up petitions as a last-resort debt collection tool. Winding up petitions for commercial rent debts are nothing new, but CIGA now prevents petitions from being issued where the tenant’s late payment is caused by the pandemic.
8) Commercial Rent (Coronavirus) Bill. In autumn 2021, the Chancellor announced a new piece of legislation that was expected to become law on 25 March 2022. The draft legislation will no doubt change between the first reading and gaining Royal Assent, but the sentiments will remain. The Commercial Rent (Coronavirus) Bill will lay down a mandatory arbitration process for rent debts related to the pandemic. The result of arbitration will be legally binding. The bill is based on an updated Commercial Rents Code, which serves as an interim stop-gap. The updated code obliges both sides to enter arbitration and sets an expectation for landlords to write off some/all of the rent arrears. The code and bill should not be used as an excuse to renegotiate rent by prosperous tenants. The aim is to preserve viable businesses on both sides of a lease. The landlord and tenant are expected to show transparency, and both must be willing to document affordability. Until the bill becomes law in 2022, landlords remain unable to evict commercial tenants for COVID-related rent arrears. The ban on seeking a County Court or High Court Judgment for Covid-related rent arrears will also expire. Prior to the pandemic, tenants and landlords were already experiencing challenging times. Advocate witnessed this first-hand by virtue of the sheer number of successful commercial debt collections for rent arrears in the preceding years. The Commercial Rent (Coronavirus) Bill could change the shape of landlord-tenant relationships for the better.
The Future with CIGA
In the year since CIGA became law, insolvencies dropped to levels not seen since 1989, and the number of restructuring plans was reduced dramatically. The economic recovery should see a surge of companies making use of Moratoriums and Restructuring introduced by CIGA. Historically, the wheels of Parliament have turned slowly, and new laws can take several years to make. CIGA took just over five weeks from the first draft to gaining Royal Assent. Ambiguity exists in most, if not all, pieces of legislation, no matter how long it has been reviewed and revised. The judiciary is ultimately responsible for interpreting the law in the spirit in which it is intended. History will show the Corporate Insolvency and Governance Act 2020 is no different. There are going to be some interesting legal precedents set in the coming years as creditors and debtors seek to gain a lasting advantage. Irrespective of the changes to claims and winding up petitions, the primary goal of Advocate (and any debt recovery practitioner worth their salt) is to recover payment as quickly and efficiently as possible.