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Updated: 28th August 2020

What the CIGA 2020 Means For Restructuring

Recent additions have been introduced as a result of the Corporate Insolvency and Governance Act 2020 (CIGA) including a free-standing moratorium and a new Restructuring Plan. Both of these options are more debtor-led than some existing measures which typically put the focus on creditors. The aim behind both of these measures is to rescue more companies as a going concern where possible, rather than jumping straight into an administration or liquidation procedure without exploring the scope for a possible turnaround.

Free-standing Moratorium

The moratorium option provides a company with temporary legal protection from its creditors as well as a payment holiday for certain debts. The moratorium initially lasts for 20 business days, although this can be extended to 40 business days without creditor consent. This can be further extended to a full 12 months should creditors give their consent or a court order is issued. Litigation cannot be instigated, nor can ongoing legal action be continued while the company is under the protection of the moratorium.

With the extra time and space provided by the moratorium, it is hoped that this will give financially distressed companies the opportunity to formulate a plan for the future, thereby increasing the chance of rescuing the company as a going concern rather than having to rush into a formal insolvency process when financial pressures reach breaking point.

A moratorium can be entered into by filing documents at court. Consent will not be required by secured creditors or Qualifying Floating Charge Holders; instead they will be notified of the moratorium by the monitor who must be a licensed insolvency practitioner.

Unlike with company administration, with the free-standing moratorium option, the directors remain in control of the company, although operations will be ‘monitored’ by the appointed insolvency practitioner throughout the process.

"The moratorium option provides a company with temporary legal protection from its creditors as well as a payment holiday for certain debts."

While the moratorium represents a useful alternative for companies and insolvency practitioners, the process is not suitable for all situations. Only those companies who can demonstrate likely long-term viability will be able to take advantage of this option. If the company is beyond the point of rescue, an insolvency practitioner would not be able to recommend this as a possible solution, however, they will be able to explore alternatives such as placing the company into a formal liquidation process such as a Company Voluntary Liquidation – or CVL.

Restructuring Plan (RP)

The Restructuring Plan (RP) is an alternative to the existing Scheme of Arrangement (SoA) option; however, this modified version includes an addition of cross-class cram-down for dissenting creditors. In simple terms, this means - so long as dissenting creditors will not be unfairly treated by the proposed restructuring plan - it can be implemented without their consent, if agreed by a court order. In order for this to happen, a minimum of 75% (by value) of at least one creditor class who would receive a payment or have a genuine economic interest in the company, voted in favour of the arrangement.

Companies which have “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” are able to explore this option. The RP process is designed to offer flexibility to a company in financial difficulty, and a variety of ultimate outcomes are permissible. A RP can be run alongside a moratorium if required.

While both the free-standing moratorium and the Restructuring Plan are welcome additions to the range of business rescue strategies, time will tell how many companies will be able to use them to their advantage.

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