Our latest primer takes a closer look at the Corporate Insolvency and Governance Act (CIGA), the UK's new ruleset that introduces new guidelines for companies in financial distress as a result of the economic crisis brought on by the Covid-19 pandemic.
What is CIGA and what does it do?
In June 2020, the UK Corporate Insolvency and Governance Act (CIGA) took effect, making both permanent and temporary changes to the restructuring landscape. CIGA is largely modeled on the English scheme of arrangement but with significant changes and enhancements. Some of the permanent changes include new moratorium protections, the abolition of ipso facto clauses from certain contracts and the creation of a restructuring plan.
Schedule 7 of CIGA sets out a new Part 26A into the Companies Act 2006, known as Arrangements and Reconstructions: Companies in Financial Difficulty. One notable difference between Part 26A and a creditors' scheme of arrangement is that under CIGA if a company wishes to restructure it must first satisfy certain conditions to prove it is under financial difficulty. In comparison, the creditors' scheme of arrangement allows any company, solvent or not, to make changes to its capital structure.
See also: UK braces for a wave of restructurings
Furthermore, under CIGA a court has the discretion to use a cross-class cram down procedure. Essentially, if at least one class of creditor proves legitimate interests votes to approve the plan then by court order all other classes of creditors are bound by that decision. This allows a court to sanction a plan without the 75% majority vote in favour at one or more of the class meetings.
The first use of the Act
On 26 September, a high court in London sanctioned the first restructuring with the use of Part 26A under CIGA, allowing Virgin Atlantic to announce a restructuring plan based around the Act. The restructuring plan sets out a five-year business plan, but Virgin is likely to enact a refinancing package worth £1.2billon over the next 18 months.
In Virgin's case, all four creditors approved the plan so a cram down was not required. "We didn’t know for certain that we were going to get the consent of each of the classes of our creditors," said Jennifer Marshall, partner at Allen and Overy. "So, we had a very good reason to use the plan. If other companies are confident in advance that they will get the necessary approvals, they may prefer to use the scheme rather than the restructuring plan.”
Introducing cross-class cram-downs brings the UK closer to its European Union and American counterparts. The US's bankruptcy code, Chapter 11, allows debtor's to cram down dissenting classes, something not possible in the UK prior to CIGA.
Similarly, the EU introduced the new Restructuring Directive in 2019 requiring member states to adopt a minimum standard for preventative restructuring frameworks. The directive pushed the EU closer to the debtor-in-possession-type insolvency regimes seen in Chapter 11.
"The preventative restructuring directive requires members states to introduce a scheme with a cross class cram down tool by July 2021," added Marshall. "With Brexit we aren’t obliged to implement that directive, but it is an interesting coincidence that CIGA ticks many of the boxes required by that directive. With Brexit looming, it is even more important that the UK remains competitive and is not left behind.”
Out with the old, in with the new
Although CIGA was introduced in June 2020, the scheme has yet to be widely used. Many firms still prefer the older scheme of arrangement. Marius Nasta, CEO of Redress solutions, said that one concern is that the legislation is more geared towards small and medium-sized enterprises. "For larger companies, CIGA is not particularly helpful. It depends on segment and segments and industry to industry. It's not a one size fits all," he said.
CIGA introduced a new moratorium procedure for companies that allowed an initial 20-day payment holiday period from most of its non-financed pre moratorium debts. This period, which can be extended, also protects a company from legal or enforcement action and forfeiture proceedings from landlords.
The government considered the moratorium as a vital tool to help companies survive the Covid-19 pandemic. However, the CIGA moratorium may have been irrelevant so far in light of the Covid-19 moratorium, which protects commercial and residential tenants who were unable to pay rent due to the pandemic from eviction.
Once the Covid-19 moratorium expires on 31 December 2020, the CIGA moratorium is likely to become more widely used. David Rubin of insolvency firm David Rubin and Partners said CIGA would have been useful in certain circumstances. "If the creditors had threatened to put companies in formal court insolvency, or said they were not giving any more time, they would have needed the moratorium," he said.
"However – due to the Covid-19 rules – nobody can issue any proceedings until January anyway. CIGA will have a much greater effect next year when the pandemic becomes less of an issue.”
The future of CIGA
As with any new legislation, there may be teething issues at the beginning. However, both CIGA and the old scheme of arrangement will, for the time being, run in tandem.
“The hearings are heard by the same judges," said Simon Thomas, partner at Goodwin Procter. "Therefore, there is a lot of confidence that things will go smoothly, given the continuity of the judiciary. In the immediate term I don’t think one will be favoured over the other.”
It may also take some time for new legislation to gain momentum. As Rubin said: “It’s like having a new coat. I'd prefer to wear an old coat first, but I’ll wear the new coat now and again until the new coat feels like home.”