The permanent insolvency measures contained in the Act had already been proposed, however, their early introduction was considered to be beneficial to assist companies through the pandemic. The permanent changes orientate the UK’s insolvency legislation more toward rescue and are similar to the Chapter 11 approach in the USA.
Permanent Insolvency Measures
Moratorium
It introduces a free-standing moratorium to give UK companies a “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium, no creditor action can be taken against the company without the court’s permission. The moratorium is overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company remains with the directors (a “debtor-in-possession” procedure).
Restructuring plan
There is a new restructuring plan to help viable companies struggling with debt obligations. Courts can sanction a restructuring plan (that binds creditors) if it is “fair and equitable”. Creditors vote on the plan, but the court can impose it on dissenting creditors (known as “cross-class cram down”).
Termination clauses
There is a prohibition on termination (or “ipso facto”) clauses that can apply when a company enters an insolvency procedure, a moratorium or begins a restructuring plan. The Act prevents suppliers from stopping their supply while a company is going through a rescue process to maximise its chances of success.
The Act includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business (small suppliers were exempt from the obligation to supply until 30 June 2021 so that they could protect their business if necessary).