Corporate Governance & Insolvency Bill – Is this the lifeboat on its way to rescue the economy and in particular the financial pressures in the world of professional sport?

The arrival of Covid-19 has inevitably affected every company on the map, from large corporations to small business owners. In this uncertain time, companies are currently looking for new and different ways to thrive whilst also trying not to lose money in the process. With financial strains being put on almost every company, it is predicted that an economic recession is on its way.

The UK government has recently published the Corporate Insolvency and Governance Bill (CGIB), a bill designed to not only rescue companies who are suffering from major financial strains but also provide further protection from creditors.

It can be argued that the UK’s Enterprise Act 2002, the initial way of helping companies through the liquidation and administration process, was not as helpful in achieving an accurate financial outcome for companies. It focused more on selling a company’s assets rather than saving the entirety of the company itself. For this reason, critics argue that reform was much needed and long overdue.

The new CGIB can be broken down in the following key parts:

  1. Company Moratorium
  2. Restructuring Plan
  3. Companies House filing
  4. AGMs and GMs
  5. Winding up petitions
  6. Termination Clauses
  7. Wrongful Trading

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Company Moratorium

The CGIB introduces a new moratorium procedure of 20 business days to allow for insolvent businesses or businesses on the brink of insolvency to restructure. This gives companies extra time to figure out how best to move forward with their company. This can be extended at the permission of creditors or the court.

This type of moratorium is similar in nature to any previous ‘moratorium’ schemes put into place under English law. The difference this time is that a licensed insolvency practitioner or ‘monitor’ will be involved. The practitioner has the role of monitoring the company and also gives added protection from any creditors. Their duties, however, are limited in that they can only help with certain aspects such as approving of sales assets or any further security over a company’s assets. The moratorium does come with limited exceptions and the following requirements:

  • A director will have to make a statement to show the company’s insolvency status and that it is unable to pay its debts
  • The practitioner must make a statement to show that a having a moratorium would result in the rescue of the company as a going concern

Restructuring Plan

Along with the moratorium, a company facing financial difficulties will also be able to create a new restructuring plan. This is based upon the “scheme of arrangement”; a procedure that has been available under the Companies Act 2006. A plan to restructure allows for companies to weigh out their options and look at any alternatives to rescue the company.

The plan differs in that it will introduce a “cross-class cramdown” meaning that dissenting creditors are bound to the plan. This means that a company can compromise its financial and equity structure without the fear of going into administration. Once finalised, this will then go to the courts who will have the final say in approving the plan if it can be shown the plan is “just and equitable”. This can be approved even if one or more classes don’t vote in favour of the plan.

Companies House filing

When filing the relevant documents to Companies House, the CGIB has allowed the Secretary of

State to make further extensions on deadlines, provided that the extended period:

  • does not exceed 42 days, in a case where the existing period is 21 days or less; and
  • does not exceed 12 months, in a case where the existing period is 3, 6 or 9 months
  • Under general company law, missing a deadline is a big deal and can result in a significant financial penalty. The extension should prove beneficial to many companies so as to prevent any penalties, sanctions or the striking off of directors on the companies register.

AGMs and GMs

Given the circumstances of the virus, the CGIB also allows for companies to hold Annual General Meetings or General Meetings by other means. This applies even where their constitution would not permit it. Both shareholder and directors are safeguarded from liability during this time, particularly regarding measures that require shareholder votes.

Winding up petitions

Usually when creditors are owed more than £750 by an insolvent company, they will petition to the courts to force the company to pay this amount; also known as a winding up petition. As there is likely to be a lot of unpaid creditors in the time of Covid-19, the bill introduces a safety net for directors.

Creditors who will be tempted to threaten a wind-up a company to collect their owed debt will not be able to do so from 27 April to 30 June 2020. In the meantime, directors should still follow their duties to creditors. Should directors be found in breach of their duties, even during this time, liquidators and administrators can still bring a claim against a director.

Termination Clauses

For some companies that require suppliers to supply goods, supplying could increase over time as a result of Covid-19. If a supplier discovers that the company they work with is on the brink of insolvency, they may stop or threaten to put a stop to future supplying. In fact, in some supplier contracts, this is often expressly stipulated and allows a supplier to take this action.

With the introduction of the CGIB, suppliers will not be able to stop supplying if and when it suits them. Even if this is stated in their respective contracts, the bill says that a supplier cannot rely on this or amend the terms of the contract where the supplies are paid for. Should hardship arise for the supplier to meet demands, they may apply to the court who can terminate on this ground.

Wrongful Trading

The introduction of the bill suspends the use of wrongful trading temporarily between 1 March to 30 June 2020. By suspending these types of provisions, this means that for this time period, liquidators and administrations will not be able to bring claims for wrongful trading. During this time, the courts will assume that a director will not be responsible if their financial position goes down.

This does not necessarily mean that directors are free of their responsibilities but rather, it gives them a bit of leniency and they should continue to maintain their financial activity and be mindful of any next steps. Furthermore, if a creditor has reasonable grounds to believe that Covid-19 has not had a financial impact on the debtor or the debtor would have been unable to pay its debts in the absence of Covid-19, then this can be an exception.

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An overview of how sports have been affected by Covid-19 and how they are handling their finances :

Football

Covid-19 has also raised many questions as to the status of football where many clubs are left in limbo as to what could happen in the next few weeks or months. Phil Hodgkinson, Huddersfield Town Chairman, believes that the worst-case scenario could see 50 or 60 clubs going bust if there is no proper financial framework put in place.

Having first hand experience with various clubs in the league, Hodgkinson states that there are a number of clubs who are still trading because they are deferring wages and creditors are still waiting to be paid. He goes on to say that even if the season goes ahead and is played behind closed doors, no fans means no income. Roughly £7m to £10m will be lost in normal revenue and that the claw-back for TV is roughly between £10m to £30m.

He believes that the future of football is the main issue that needs to be tackled, specifically how the football pyramid can continue without any incoming revenue. Hodgkinson suggests that reducing a player’s wages, whilst not ideal, could be a possible solution. In the meantime, Hodgkinson has written a letter to the EFL but has not yet received a proper response.

Rugby

Building upon Phil Hodgkinson’s comments regarding players taking a pay cut, this is also a worry in the rugby world. Whether or not a player plays for a higher or lower league club, there is a financial uncertainty when it comes to a player’s wages and how much each player is worth. The Castleford Tigers, a club that competes in the Super League, gives a good example of this. Jon Wells, the director of Rugby at Castleford, states that there will be a “significant levelling-down exercise in rugby league finances” and asks “is a £100,000 player now worth £80,000? Is an £80,000 player now worth £72,000?”. When it comes to spectators, Castleford is a small town so the club relies heavily on the number of attendees to help with their finances.

When it comes to rugby in the UK, we have been told that the Rugby Football League (RFL) recently secured a £16m loan to help with its finances. The RFL has intimate knowledge of each club’s business models which means that finances should be distributed fairly amongst each club.

The 2020 Six Nations, due to be completed in October and November this year, is planned to be played behind closed doors. However, should this be postponed to 2021, the loss of income could amount to £107m. Bill Sweeney, chief executive of the Rugby Football Union, states that should this occur, this would be catastrophic and they would require more government bailout.

Cricket

In a similar vein to football and rugby, cricket is looking to resume on 1 July at the earliest date where there is a plan for games to be played behind closed doors. Again, with no spectators, there will be no income. However, should cricket not be played at all this summer, the sport could be losing up to a staggering £380m as a worst-case scenario according to Tom Harrison, the chief executive of the England & Wales Cricket Board (ECB).

It is said that this is a more serious problem when we look at cricket at the grass-roots level which is estimated at a potential loss of £32m. In addition, The Hundred, a new competition that was set to launch on 17 July promised more income and spectator participation. As this date is fast approaching, it may not commence as a result of the virus. As for women’s cricket, this is more uncertain as there is a possibility it will be sacrificed in order to save men’s cricket which is seen as more lucrative. Clare Connor, ECB’s managing director of women’s cricket said that it would be devastating if there was no international women’s cricket taking place this summer but if playing less women’s cricket will help safeguard the sport’s long-term future then it is “probably a hit we might have to take” and that there is a “financial necessity” that rests on the international men’s matches.

In order to help with finances, we have been told that centrally contract men’s and women’s players have volunteered to take a three month pay cut. Pay cuts were also taken from existing working staff and furloughed staff who work for ECB.

How can the CGIB help sports?

In instances like this, the CGIB should be able to assist both professional and semi-professional sports, particularly lower league clubs that have been hit financially hard by Covid-19. When it comes to having a proper discussion regarding revenue, all clubs could certainly benefit from both a 20-business day moratorium and restructuring plan which will give them time to rethink and re-evaluate. Club managers and owners should also bear in mind any time restrictions that the bill presents. Some of the measures set out in the CGIB are temporary and will only be available until the end of June 2020. This includes winding up petitions and wrongful trading. If clubs intend to rely on these measures, the time to act is now rather than later.

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For more information on the Corporate Insolvency and Governance Bill and the latest on sporting matters in the UK, please visit the following websites:

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Front Row Legal are a boutique law firm that specialises in Sport, Media and Business Law in England and Wales. They have specialist knowledge in these areas of law, which means they can help where many law firms won’t have the experience. They are based in Leeds with a national client base. frontrowlegal.com