The Corporate Insolvency and Governance Act 2020 was introduced as a response to the Covid-19 pandemic and is designed to increase the chances of company survival.
The Act puts into place three permanent measures to Insolvency Law:
- The provision of a moratorium
- Allowing companies to propose a restructuring plan
- Prohibition on terminating supplier contracts
My previous blog discussed the impact and repercussions to suppliers and businesses of the suspension of the termination clause in supplier contracts. You can read it here.
Next, I am going to have a closer look at the provision which allows a financially struggling business to propose a restructuring plan in order to save itself from Liquidation.
Which types of businesses are eligible to propose a restructuring plan?
Aside from financial services, any business can propose a restructuring plan, provided the company is likely to or is already going through financial difficulty to such an extent that it will hinder or is already hindering their ability to operate normally.
The purpose of the restructuring plan would be to help a business survive the repercussions of Covid-19. A restructuring plan would mean a business is run in a different way and under a new model in order to ease cash flow issues.
To whom is the restructuring plan proposed?
The plan is proposed to certain stakeholders that will be affected by any direction that the business would propose to take. Most commonly, this would be the Creditors (people who are owed money by the business) or Business Members who have a general interest in the business.
Essentially, anyone whose “rights would be affected” by the proposal is to be included.
What happens after the proposal is ready?
Once the Directors of the company have made their proposal they must, by way of a written notice, invite the Creditors and Business Members to a meeting to discuss said proposal. In some cases, the Court will send an order to summon the meeting.
What happens at the meeting?
The proposal is discussed at the meeting. Any proposal must:
- clearly state and acknowledge the material interests of the Creditors and Business Members i.e. their cash investments, any assets they own and any other material interest and
- clearly state how the restructuring proposal will affect those material interests in a way different to other people i.e. explain to Creditor A how their material interest will be affected compared to other Creditors.
Once the proposal has been discussed, the Creditors and Business Members must vote on it. If 75% of people vote in favour of the proposal, it becomes legally binding, even on those who voted against it.
How is this different to a Company Voluntary Arrangement (CVA)?
This new measure under CIGA 2020 does sound very similar to CVAs and other types of arrangements. The key difference is that the Court order becomes legally binding on secured creditors as well as unsecured Creditors. The former are usually financial institutions like banks – so you’re safe from all Creditors/Members, once a proposal is agreed.
Next steps
Business restructuring plans and proposals are done by experts in the field, namely, Insolvency Practitioners. If you are facing financial difficulty and would like to secure yourself from pressure from Creditors, please call me on 0330 236 9930, 0330 236 9938 or 07961 116321. The first conversation is free of charge and all conversations are in strict confidence. You can also email me on vee@navigatebr.com.
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