What does the Corporate Insolvency and Governance Act 2020 (CIGA) do?

CIGA introduces various changes to various provisions of the Insolvency Act 1986 and the Companies Act 2006.

Some of these changes are designed to be permanent changes to the insolvency landscape (largely implementing proposals for insolvency law reform introduced in 2018) – for example, the introduction of a moratorium, a ban on termination provisions (also known as ipso facto clauses) and a new pre-insolvency rescue and restructuring regime.

Others changes are of a more temporary nature and are designed to address (or, at least, try to mitigate) certain issues arising from the Covid-19 pandemic. These measures include temporary changes to the wrongful trading rules and the suspension of winding-up petitions where the company’s financial distress has been caused by Covid-19.

In this note, we examine the impact of CIGA on secured lenders (including providers of asset-based lending and invoice discounting facilities) and their enforcement options.

What is the purpose of the new moratorium?

CIGA introduces a new moratorium to give companies and LLPs in financial distress time to consider a rescue plan. This new moratorium will be a permanent feature of the new insolvency landscape.

Subject to certain exceptions, the moratorium will be available as an option for many English companies, English LLPs and overseas companies in relation to which the English court has winding-up jurisdiction. 

The moratorium will initially last for 20 business days, although its duration can be extended to 40 business days or more, via the courts or by creditor agreement. 

A monitor (a licensed insolvency practitioner who will be acting as an officer of the court) will administer the moratorium. 

Will the company have to make payments to lenders during the moratorium?

The company will not have to pay most pre-moratorium debts during the moratorium. 

Pre-moratorium debts are debts or other liabilities of the company falling due before the start of the moratorium or becoming due during the moratorium pursuant to obligations incurred by the company before the start of the moratorium. 

This payment holiday will apply to trade creditors. However, it does not apply to pre-moratorium debts arising under financial services contracts - this includes payments under loan agreements and factoring / invoice discounting arrangements. 

The company must therefore continue to make payments of principal and interest (or discount charges, in the case of invoice discounting facilities) to lenders under such agreements, regardless of whether such payments become due before or after the start of the moratorium. 

If the monitor thinks the company is unable to make these payments, the monitor must end the moratorium.

What actions can a lender take during the moratorium?

CIGA introduces various prohibitions on clauses allowing a supplier to terminate, vary or otherwise exercise its rights under a contract due to the occurrence of insolvency (so-called “ipso facto” clauses). This is to prevent suppliers holding the threat of termination over a company in order to compel the company to pay its pre-insolvency arrears or to force the company to agree to contractual terms more favourable to the supplier.

However, these new provisions only apply to contracts for the supply of goods and services and CIGA makes clear that they do not extend to loan agreements or factoring arrangements (both of which are specifically referenced in the list of excluded ‘financial contracts’).

This means that, following the start of a moratorium, a lender will not be restricted from declaring an event of default (including an event of default for which the trigger is entry into the moratorium), accelerating the loan or terminating, amending or otherwise exercising their rights under a facility agreement.

Declaring an event of default

Lenders will still be able to declare events of default under their financing agreements during a moratorium.

Entry by the borrower into the moratorium may itself trigger an event of default, depending on the drafting of the facility agreement. Under most LMA-based facility agreements, the taking of any steps in relation to a moratorium of any indebtedness will constitute an event of default.

Accelerating the loan

If an event of default is triggered (either by entry into the moratorium, or by some other event which occurs during the moratorium), the lender can declare an event of default and / or accelerate the loan, even if the borrower is subject to the new moratorium.

If the borrower cannot pay the accelerated loan, the monitor will have to end the moratorium unless the lender agrees to an extension. Once the moratorium has ended, the lender can enforce its security, for example by appointing an administrator. However, until that time, the lender is restricted from taking any action to enforce its security (see below).

Implementing a draw-stop, terminating / amending and exercising other rights under the financing agreement

Following the company’s entry into the moratorium, a lender can also exercise any other rights it has under the financing agreement, including any rights it has to terminate the agreement, implement a draw-stop, amend the agreement, apply contractual set-off rights or charge default interest.

What actions can a lender not take during the moratorium?

Although the lender can declare an event of default and accelerate the loan, the lender cannot take any of the following actions during the moratorium:

• commencing insolvency proceedings (including appointing an administrator);
• enforcing security (other than security which is a financial collateral arrangement or where certain steps are taken with the permission of the court);
• commencing legal proceedings against the company or its property (subject to certain limited exceptions);
• repossessing goods under a hire-purchase agreement; or
• crystallising a floating charge or imposing any restrictions on disposal of a floating charge asset.

This means that a secured lender’s enforcement options are severely restricted during the moratorium. 

Fixed charges

During a moratorium the company may, with the permission of the court, dispose of property which is subject to a security interest as if it were not subject to the security interest. 

On the face of it, this is a concern for fixed charged holders as it means a loss of control over the relevant charged assets.

However, a disposal made under this provision can only occur in certain circumstances, which generally seem to align with the secured lender's interests. 

The disposal will only be possible with the consent of the court (where presumably the court would take account of representations made by the secured creditor) and only in instances where it will support the rescue of the company as a going concern. 

In addition, the company must pay all monies received from the sale (plus a required top-up to market value) to secured creditors.

Floating charges

During a moratorium the holder of a floating charge cannot give any notice to crystallise a floating charge or exercise a contractual right to serve a notice which would have the effect of restricting the disposal of property by a company. 

Post-moratorium

The monitor must end the moratorium if it thinks that the company cannot satisfy its payment obligations (which will include both historic and current loan repayments). 

The moratorium will also come to an end if the directors of the company file notice of an intention to appoint an administrator.

Once the moratorium has ended, the lender can enforce its security. 

Originally, it was proposed that financial creditors would enjoy a “super-priority” for their debts if a company entered into liquidation or administration within 12 weeks after the end of the moratorium. However, the Act was amended during its passage through Parliament and this was removed. A lender can, as explained above, accelerate its debt during the moratorium but this will not now enjoy “super-priority” in any liquidation or administration entered into in the 12 weeks following the end of the moratorium. 

Should lenders make changes to finance documents?

Facility agreements

On 3 July 2020, the LMA announced that it would not be amending any of its recommended forms to take account of CIGA.

Therefore, at this time we are not recommending any changes to the drafting of provisions of facility agreements following LMA drafting.

However, lenders should review the insolvency-related events of default in their own facility agreements to ensure that they expressly capture the new moratorium and restructuring plan. 

Security agreements

The terms of a floating charge will normally permit the company to dispose of floating charge assets (e.g. inventory) in the ordinary course of business. 

Under CIGA, any provision in an instrument creating a floating charge that triggers crystallisation of the floating charge, imposes any restrictions on disposal of the company’s property or provides for the appointment of a receiver on the commencement of a moratorium or anything done with a view to commencing a moratorium is void. 

The broad drafting of “imposes any restrictions on disposals of the company’s property” means that a lender cannot link the imposition of any restrictions to the occurrence of a moratorium.

CIGA also provides that, during a moratorium, a floating charge holder cannot give any notice that would have the effect of:

1. causing a floating charge to crystallise; or
2. causing the imposition, by virtue of the instrument creating the charge, of any restriction on the disposal of property of the company.

This restriction does not apply to a floating charge that is a security financial collateral arrangement. However, in practice, due to the possession and control requirements most floating charges are unlikely to be security financial collateral arrangements.

Since the floating charge cannot be crystallised during the moratorium, the company will be able to continue selling such floating charge assets for the duration of the moratorium. This may result in a significant reduction of the value of the lender’s security.

Secured lenders should therefore consider tightening the provisions of their security documents to ensure that they contain adequate restrictions around the sale of floating charge assets. For example, the lender may wish to include provisions that sales of inventory over a certain value require express lender consent. Since such restrictions cannot be linked to the moratorium, they would need to be in place for the duration of the security period.

In addition, where a lender is relying on a fixed charge, it should ensure that it exercises the level of control necessary to avoid the risk that the charge is characterised as a floating charge. 

It is important that the lender can demonstrate that it has this control in practice and not just under the terms of the security agreement. For a lender against hard assets, such as plant and machinery, this means ensuring that such assets are plated to put the world on notice of the lender’s security interest. 

Where the lender is relying on a fixed charged over receivables, it must ensure that it has full control of the proceeds of such receivables, for example by insisting that they are paid into a blocked account.

Other key changes

New restructuring plan

CIGA also introduces a new restructuring plan. This will allow financially distressed companies (or their creditors or members) to propose a restructuring plan as an alternative rescue option.

The new plan also introduces “cross-class cram-down”. The cross-class cram-down provisions mean that dissenting creditors will be bound by the plan if a court sanctions that this would be fair and equitable and is satisfied that those creditors would be no worse off under the proposed plan that they would be in the event of a “relevant alternative”. The “relevant alternative” means whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned.