The Corporate Governance and Insolvency Bill has been introduced into the United Kingdom Parliament and is due for debate on 3 June.
This article in its Part A examines details of the Bill; in Part B reviews the Bill’s April 2020 impact assessment as to how it is expected to assist; and in Part C looks at the planned implementation review of the new law, to be done in 5 years, or sooner, with this process briefly compared with Australia’s law review process.
Part A – the Corporate Governance and Insolvency Bill
It will put in place a series of measures to amend UK insolvency and company law to support business to address the challenges resulting from the impact of coronavirus (COVID-19). This follows Australia’s similar efforts and New Zealand’s. However some of the UK changes were proposed some time ago, for example its moratorium, with the current crisis prompting their introduction now.
The Bill consists of 6 insolvency measures:
- a new moratorium to give companies breathing space from their creditors while they seek a rescue
- prohibition of termination ‘ipso facto’ clauses that engage on insolvency, preventing suppliers from ceasing their supply or asking for additional payments while a company is going through a rescue process
- a new restructuring plan that will bind creditors
- ‘enabling the insolvency regime to flex to meet the demands of the emergency’
- temporary removal of the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency
- temporary prohibition on creditors from filing statutory demands and winding up petitions for coronavirus related debts.
And 2 corporate governance measures:
- temporary easing of burdens on businesses by enabling them to hold closed annual general meetings, to conduct business and communicate with members electronically, and by extending filing deadlines
- allowance for the temporary measures to be retrospective.
The Bill’s 3 main purposes are said to be:
- to introduce new corporate restructuring tools to the insolvency and restructuring regime;
- to temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action
- to amend company law and other legislation to provide companies and other bodies with temporary relief from company filing and annual general meetings requirements.
A series of fact sheets well explain how the measures are anticipated to assist.
Part B – The planning behind the Bill – the Impact Assessment of 21 April 2020
Of interest are the assessments and calculations behind the Bill.
The expected downturn – insolvencies ranging from 30,000 to 160,000?
The Impact Assessment reported early data points that were consistent with a downturn in the UK that it said could be more severe than in the financial crash of 2008/09.
The number of company insolvencies increased by over 50% during that 2008/09 period, and it more than doubled in the 1990s recession.
In a “normal” year about 200,000 jobs and about £23bn of output are lost to insolvency – a 50% to 100% increase (or greater) would have a severe effect on businesses, individuals and supply chains.
Scenarios for numbers of corporate insolvencies could range from 30,000 to 160,000.
Licensed insolvency practitioners – how many? 1,244 + The Official Receiver
The assessment reports that at 1 January 2019, there were 1,244 appointment-taking insolvency practitioners.
Those insolvency practitioners received on average £77,000 in remuneration per case based on recent data. UK administrations on average last 12 months resulting in a monthly remuneration cost of £6,400.
It should also be noted that the UK has the government Official Receiver to take on liquidations and bankruptcies.
The different types of insolvencies – impact of the Bill
A random sample of 469 administrations starting after 2016 sourced from Companies House data shows that saving the company as a going concern (1.3%) or performing a restructuring such as a Creditors Voluntary Arrangement (CVA) (0.4%) following an administration is uncommon with only 1.7% of cases falling in these groups.
Hence the use of the new moratorium to restructure should increase the numbers of these outcomes. Of the 1,000-1,500 moratoriums anticipated, the IA estimates that 2%, around 20-30, may move into a better outcome, such as a CVA, rather than administration, following the moratorium.
During 2019 there were around 16,000 compulsory and creditors’ voluntary liquidations (CVLs) in the UK, and estimating 10% would mean around 1,600 liquidations would be avoided.
Companies that avoided liquidation would instead likely enter administration – the primary company rescue procedure – which would lead to an improved outcome for creditors.
That was supported by Insolvency Service 2020 data, from a sample of 500 administrations and 232 CVLs, which showed the average creditors’ claim in an administration amounted to £6.3m and the average returns to creditors in administration and CVL were 16% and 5% respectively.
Restructuring plans – only large businesses
The flexible restructuring plan will be available to all business sizes but it is anticipated that the measure will be used by only a small proportion of companies, with around 50-100 restructuring plans estimated annually. Furthermore, the proposed measure will appeal more to cases involving complex capital structures that have a diverse range of stakeholders.
Therefore, the take up by small and micro business is expected to be small.
The measure is expected to almost always be proposed by the company, meaning that costs associated with the measure would be a deliberate choice for small and micro businesses.
Part C – A post-implementation review
In line with the UK’s Better Regulation guidance, a post-implementation review (PIR) of the measures will be conducted, making use of guidance on evaluation processes in what is termed the Magenta Book. Such a review allows an assessment of the value delivered from public spending thereby improving outcomes.
The Magenta Book provides a comprehensive overview of evaluation in government: its scoping, design, management, use and dissemination, as well as the capabilities required of government evaluators. It aligns with the UK Green Book, which sets out the economic principles that should be applied to both appraisal and evaluation.
In line with that guidance, a PIR will be conducted five years after the measures come into force, that is, 2025. However, they could be evaluated sooner to ensure the measures are fit for purpose, or ‘if existing stakeholder channels provide anecdotal evidence that they have not landed as expected’, suggesting a review is required.
The PIR will be used to establish if the measures were able to achieve their aims, if they resulted in any unintended consequences and if the measures could be improved upon.
Unlike Australia, many of the UK reforms in the Bill are unconnected with the impact of the COVID-19 crisis.
Counterfactuals, mixed methods approaches …
The assessment says that estimating the counterfactual will be a challenging aspect, given the nature of the policy rollout. For this reason, the PIR is likely to focus on monitoring and process evaluation elements.
Furthermore, the Covid-19 pandemic will have a significant impact on the success of the measures, given its impact on the economy. Therefore, ‘any non-experimental pre- and post-policy monitoring will need to be cautious in its narrative’.
Ideally a mixed methods approach will be used to inform the PIR, such as monitoring data and primary data collection.
Companies House already collects data on the use and outcomes of existing measures and it is anticipated that Companies House will collect data on use of company moratoriums and flexible restructuring plans.
Options will be explored on whether this data can be supported through primary data collection (quantitative and/or qualitative) with stakeholders to help understand how the measures have been used and if that is in line with their intended purpose. This approach can also reveal any unintended consequences of the measures, and whether any adaptations need to be made.
There is no stated post-implementation review of the Australian COVID-19 insolvency reforms but the original safe harbour changes under s 588GA were due for review after September 2019, under s 588HA Corporations Act. That review has not proceeded, no doubt impacted by COVID-19 and the additional safe harbour protection under s 588GAAA.
However a PIR may be required on the COVID-19 insolvency changes in Australia under PIR Guidance Note of 30 March 2020 with a view to evaluating whether the changes operated as intended and effectively and efficiently met the government’s objectives.
Under the Guidance Note, Australian Government agencies need to undertake a PIR for all regulatory changes that have a substantial or widespread impact on the economy. A PIR is also needed when a regulatory change is made without a Regulation Impact Statement (RIS); there was no time for a RIS in the COVID circumstances. The Note explains what happens when there is a separate statutory review provision – such as s 588HA.
Most if not all of Australia’s COVID-19 changes are destined to end in September, though it could be that experience with the changes prompts related law reform ideas.