The Corporate Governance and Insolvency Act 2020 introduced a range of measures designed to help companies and organisations in financial distress, both during the Covid-19 pandemic and beyond. These measures included a moratorium to allow companies in difficulty to explore rescue options without the fear of creditor action. These regulations make provisions for moratorium arrangements for Charitable Incorporated Organisations (CIOs). They have been introduced by the Department for Culture, Media and Sport (DCMS).
The Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) Regulations 2020
The Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) Regulations 2020 amended existing regulations governing CIOs to make provision for moratorium arrangements set out in the Corporate Governance and Insolvency Act 2020. Namely, to protect charities and charitable organisations in financial difficulty from dissolution whilst remedy is sought.
These regulations were applied to all CIOs except for (a) a private registered provider of social housing; or (b) those registered as a social landlord under Part 1 of the Housing Act 1996. The regulations provided that trustees of a charity could not apply for dissolution of that CIO if a moratorium was in force.
The Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) (No. 2) Regulations 2020
These new regulations revoke and supersede the Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) Regulations 2020.
The new regulations make the same provision about the above, including which CIOs are excluded from the measures and that trustees of a charity may not apply for dissolution of a CIO if a moratorium is in force.
A key difference is that the No. 2 regulations specifically disapply section A51 of the Insolvency Act 1986 in relation to CIOs. Section A51 enables the secretary of state to make regulations in respect of companies that are subject to a moratorium to allow the Board of the Pension Protection Fund to exercise creditor rights in connection with the moratorium. This alteration attracted comment from the Joint Committee on Statutory Instruments.
Joint Committee on Statutory Instruments
Regulation 5(2) amends the Charitable Incorporated Organisations (Insolvency and Dissolution) regulations with the effect (amongst other things) of disapplying section A51 of the 1986 Act in relation to CIOs. […] The committee asked the Department for Digital, Culture, Media and Sport to explain why section A51 was being disapplied, in the light of the fact that the powers conferred by that section are relied on in relation to CIOs in the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 (SI 2020/693), which were made only five weeks before these regulations.
In a memorandum [to the committee], the department acknowledges that the effect of disapplying section A51 will be to revoke SI 2020/693 to the extent that that instrument applies to CIOs. The department explains that the decision to disapply section A51 was based on the view that that section was unlikely to have any practical impact for CIOs. However, the department goes on to state that, because the implied revocation of an aspect of SI 2020/693 is liable to cause confusion and because there is a theoretical possibility that these provisions may be beneficial for CIOs in the future, the department will bring forward legislation at the next available opportunity to reinstate the application of SI 2020/693 to CIOs.
The committee also commented on what it suggested was a lack of communication between the two departments involved:
One matter the memorandum does not address is what communication, if any, took place between DCMS and the Department for Work and Pensions before either this instrument or SI 2020/693 was made. The fact that there is a conflict between the two instruments as to the application of section A51 to CIOs suggests that there may not have been any, which the committee finds disturbing given the shared policy interest of the two departments.
The committee said therefore it was reporting regulation 5(2) for “unexpected use of the enabling power”.
Debate in the House of Commons
During a debate on the regulations in the House of Commons on 24 September, the Parliamentary Under Secretary of State for Digital, Culture, Media and Sport, Matt Warman, said:
The [Corporate Insolvency and Governance Act 2020] also introduced a new freestanding moratorium procedure, intended to give the relevant bodies regulated breathing space to explore restructure options, free from creditor action. The new moratorium provisions were applied by adding a new part A1 to the Insolvency Act 1986. The regulations that we are discussing today make minor and technical modifications to the way the 1986 Act applies to CIOs via the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012. Most of the modifications disapply provisions of the moratorium procedure that are not applicable or relevant to CIOs. They ensure the effective application of the moratorium provisions.
About the disapplication of section A51, he explained:
Our approach in applying the new moratorium procedure to CIOs was to disapply provisions considered unnecessary or extremely unlikely to have any practical impact, to simplify the moratorium procedure for CIOs. That included disapplying section A51 of the Insolvency Act 1986. However, on 6 July 2020 the Department for Work and Pensions used the provision to enact secondary legislation to extend their Pension Protection Fund moratorium provisions to CIOs. We assess the likelihood of the Pension Protection Fund needing to intervene in a moratorium with respect to a CIO as extremely low. However, DCMS recognises the value of ensuring that all corporate forms are covered by the provision and will bring forward legislation. In the meantime, we do not anticipate any practical impacts.
Mr Warman also said the regulations had been introduced to correct drafting errors:
I want to bring one further issue to the attention of the Committee, which is that the regulations modify the initial regulations made on 6 July, which contained a number of errors and needed to be corrected, although we do not believe that any stakeholder suffered detriment due to the error. We have, however, written to the Joint Committee on Statutory Instruments to apologise for that.
Speaking for the Labour Party, Rachael Maskell MP said her party supported the measures, but asked why a twenty-day period was chosen for the duration of moratorium arrangements:
Today’s measures first seek to provide minor technical modifications to existing legislation. […] The free-standing moratorium period is described as giving an organisation a breathing space during which time some creditors cannot take specific types of enforcement and action. Why are all creditors not put in that position in order to create a proper breathing space for all the organisations at risk? Normally this period is 20 business days, but is extendable with creditors’ consent or a court order. However, we know that 20 business days is no time at all to turn an organisation around, so why was 20 days chosen and what impact will it have? How will the minister make it easier for organisations to extend that time? More time will be needed. Many of the organisations are large businesses and will need support, but many are also small and dependent on trustees to oversee their affairs.
She also noted the “huge pressure and liabilities” the insolvency process can place on trustees and argued that greater protections for them should also be put in place.
- House of Lords Library, Corporate Insolvency and Governance Bill: Briefing for Lords Stages, 5 June 2020
- Twelfth Delegated Legislation Committee: Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) (No. 2) Regulations 2020, HC Hansard, 24 September 2020, cols 1–6.
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