The Crown Preference is Law (Again): Spinning the Clock Back to Early-2000s?

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Dr. Eugenio Vaccari, Lecturer in Law, University of Essex

The Pari Passu Principle

In corporate insolvency procedures, not all creditors are alike. This is despite the pari passu principle.

The pari passu principle is often said to be a fundamental rule of any corporate insolvency law system. It holds that, when the proceeds generated by the sale of debtor’s assets are distributed to creditors as part of an insolvency procedure, they have to be shared rateably. In other words, each creditor is entitled to a share of these proceeds that corresponds to the percentage of debt owed by the company to its creditors.

Imagine that a company has creditors for £100,000. Creditor A has a claim for £1,000, creditor B for £5,000. The company is insolvent and it is liquidated. The sale generates £50,000 of proceeds available to be distributed to the creditors. While it would have been possible to say that, for instance, older creditors or creditors with larger claims are paid first, the pari passsu principle states that all creditors are treated alike. As a result, creditor A will receive 1% of these proceeds (£500), while creditor B will receive 5% of them (£2,500).

There are, of course, exceptions to the pari passu principle.

First, the pari passu principle applies only to assets that are available for distribution. For instance, a bank may have granted a mortgage to the debtor to buy a property, and the debtor may have given that property as a collateral to the bank. If the debtor becomes insolvent, the proceeds generated by the sale of that property are distributed first to the bank and then, if anything is left, to the other creditors.

Secondly, the law might introduce exceptions to this principle in order to prioritise the payment to creditors that are deemed particularly worthy of additional protection.

The Law

Until the Enterprise Act 2002, the Inland Revenue and HM Customs & Excise (now HMRC) were granted a status as preferential creditors for certain debts listed in Schedule 6 of the Insolvency Act 1986. As a result, debts owed to the them had to be fully paid before any distribution to floating charge holders, pension schemes and unsecured creditors (among others) was made.

This preferential status granted these agencies a stream of £60-90 million each year in insolvencies. Section 251 of the Enterprise Act 2002, however, abolished the Crown’s status as preferential creditor and introduced a new regime (the ‘prescribed part’) wherein a portion of the distributions in liquidation was ring-fenced specifically for unsecured creditors.

Back in the 2018 Budget, mixed in with many other tweaks, the Government announced a seemingly innocuous change to the way in which business insolvencies will be handled from 6 April 2020 (later postponed to insolvencies commencing on or after 1 December 2020, irrespective of the date that the tax debts were incurred or the date of the qualifying floating charge).

Without attracting much publicity, the announced move was codified in sections 98 and 99 of the Finance Act 2020, which received Royal Assent on 22nd of July 2020. As a result, HMRC gained secondary preferential treatment over non-preferential and floating charge holders – often banks that have loaned money to firms – for uncapped amounts of VAT, Pay As You Earn (‘PAYE’) income tax, student loan repayments, employee National Insurance Contributions (‘NICs’) or construction industry scheme deductions.

In a related development, Parliament also approved the Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020. The effect of this Act is to increase the prescribed part from £600,000 to £800,000. However, this change does not apply to floating charges created before 6 April 2020.

So What?

The Government argues that giving HMRC priority for collecting taxes paid by employees and customers to companies is appropriate. These represent taxes that are paid by citizens with the full expectation that they are used to fund public services. Absent any form of priority, this money actually gets distributed to creditors instead. As a result, the Exchequer should move ahead of others in the pecking order and give HMRC a better chance of reclaiming the £185m per year they lose.

These explanations do not appear totally sound. The creation of the prescribed part and the increase of its cap to £800,000 served the purpose of ensuring that at least some of this money is paid back to the HMRC and used to fund public services. What has not been properly considered is the impact the Crown preference and the increased prescribed part will have on: (i) the wider lending market and access to finance; as well as (ii) corporate rescue practices.

With reference to lending practices, the new system disproportionately affects floating charge holders and unsecured creditors. The abolition of administrative receivership – a procedure controlled by lenders – by the Enterprise Act 2002 was compensated by the loss of preferential status for the HMRC. The re-introduction of such preference means that lenders in general and floating charge holders in particular will be pushed to lend money at higher interest rates, as lenders have no idea as to the tax arrears of any borrower on a day to day basis.

Lenders now face a double blow (increased prescribed part and Crown preference) in relation to realisations from the floating charge. They are, therefore, likely to reduce the amounts that they lend to businesses, to take account of the dilution in the realisations that they would receive in insolvency. This is a particularly unwelcome outcome in the current marketplace.

Lenders are even more likely to seek fixed charge (where possible) and to introduce covenants for reviewing the debtor’s tax liabilities. Such liabilities are likely to increase significantly in the next few months, as VAT payments due by businesses between March and June 2020 have been deferred until the end of the 2020/21 tax year. Lenders may also insist that a borrower holds tax reserves to deal with liabilities to HMRC and, in large operations, on group structures which minimise the dilution from Crown preference.

Finally, unsecured creditors may choose to protect themselves by keeping their payment terms as tight as possible and limiting the number of days that credit is offered for.

Additionally, and perhaps more importantly, such move may hamper the willingness to support an enterprise and rescue culture, which was the main justification for the abolition of the Crown’s preference. This is because HMRC’s gain is the other creditors’ loss, especially considering that the taxes classified under the preferential claim are ‘uncapped’ (while before the enactment of the Enterprise Act 2002 they were capped to amounts due to up to 1 year before the commencement of the procedure).

Despite assurances to the contrary, the existence of a preferential treatment may push the HMRC to exercise increased control over the insolvency process and promote early petitions for liquidation in the hope of higher return.

Also, the HMRC has never historically been particularly supportive of reorganisation efforts. This means that distressed companies may have to file for a new restructuring plan under part 26A of the Companies Act 2006 and seek a court-approved cross-class cram-down to overcome the HMRC’s negative vote. Such an approach would increase cost, litigation and time needed for the reorganisation effort, thus potentially pushing viable debtors out of business.

There are other elements that militate against the re-introduction of such preferential status. HMRC currently have the ability to robustly manage their debt. HMRC have powers not available to other unsecured creditors, including the ability to take enforcement action without a court order to seize assets and to deduct amounts directly from bank accounts.

HMRC have the power to issue Personal Liability Notices to corporate officers for a failure to pay National Insurance Contributions (NICs) or future unpaid payroll taxes. HMRC also have the power to insist on upfront security deposits where there is a genuine risk of non-payment of PAYE, NICs or Value Added Tax (VAT). Similarly, HMRC may issue Accelerated Payment Notices for disputed tax debts.

One of the key features of the English corporate insolvency framework is its focus on promoting business rescue and, more in general, a rescue culture, as evidenced in previous papers[1] by the author of this post. The recent long-term changes introduced by the Corporate Insolvency and Governance Act 2020 seemed to go in the direction of strengthening the rescue attitude. It makes, therefore, little sense to introduce policies designed to help businesses survive the Covid-19 pandemic and, at the same time, reduce their ability to borrow cheaply. The re-introduction of the preferential status for certain unpaid taxes spins the clock back to 2003 and is likely to hurt the existing, fragile business recovery.

The publications mentioned in this article are available on Westlaw, and Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.

[1] E Vaccari ‘English Pre-Packaged Corporate Rescue Procedures: Is there a Case for Propping Industry Self-Regulation and Industry-Led Measures such as the Pre-Pack Pool?’ (2020) 31(3) I.C.C.L.R. 169; E Vaccari, ‘Corporate Insolvency Reforms in England: Rescuing a “Broken Bench”? A Critical Analysis of Light Touch Administrations and New Restructuring Plans’ (2020) I.C.C.L.R. (accepted for publication); E Vaccari, ‘The New ‘Alert Procedure’ in Italy: Regarder au-delà du modèle français?’ (2020) I.I.R. (accepted for publication).

Pre-Pack Pool, Quo Vadis?

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Dr. Eugenio Vaccari, Lecturer in Law, University of Essex

Failure is a fact of life in any sphere of human activity.[1] Each individual can share stories of their personal failures in life. Some of these failures make us stronger, more successful and resilient in the long run.

Beside events that only affect us in the personal sphere, there are other more “tangible” failures, which affect our profession, assets and capacity to generate income.

In this respect, companies are no different from human beings. Companies – even successful ones – may fail to invent, launch and promote a new product on the market or simply generate enough cash to cover development costs of a product that otherwise met the consumers’ favour. If failure is not limited to a single product, it may threaten the survival of the company.

However, failure may also be determined by external factors, such as a sudden lack of demand from the consumer’s side (as in the aftermath of the Covid-19 pandemic) or an unexpected increase in interest rates. These external factors – either alone or coupled with other causes – may push a company into a formal insolvency proceeding.

More frequently than not, companies that are pushed into insolvency for the pressure exerted by external factors may still be viable. Yet, the only people who have the expertise and knowledge, as well as the courage to invest in a failing business, are usually the existing owners and directors of the ailing company.

Under English law, one of the most popular methods by means of which existing owners buy back an insolvent company, thus preserving its core business and as many jobs as possible, is called pre-pack administration (‘pre-pack’).

In a “pre-pack”, a prospective buyer and key creditors conclude an agreement on the sale or restructuring of the company in advance of statutory administration procedures. In a “connected pre-pack”, the buyer is usually the seller – the owners buy back a significant portion of the company minus a sizeable amount of its existing debt.

Clearly, connected pre-packs raise issues of transparency, fairness and valuation of the debtor’s assets. Creditors may feel that they are paid a pittance while the existing owners are set free without punishment and retain the control of assets that could have generated more money if liquidated in a competitive procedure, such as through a properly advertised auction procedure.

To allay the fears of disgruntled creditors, the Government introduced in 2015 the Pre-Pack Pool (‘the Pool’). The Pool is an independent body of experienced business people that gives an opinion on whether the connected pre-pack sale is reasonable and in the best interests of creditors.

The Pool has proven effective in dealing with connected pre-packs, as evidenced by the most recent sale of Go Outdoors. In this case, the debtor was sold back by its previous owner JD Sports by means of a deal cleared by the Pool in less than 24 hours. The Pool has risen to prominence, to the extent that it has been taken as a model for recent innovations in other jurisdictions, such as the business panel in Italian alert procedures. Dr. Vaccari is working on a paper (due to be published in August 2020 in the International Insolvency Review) which will disclose the links between the English Pool and the Italian panel.

Furthermore, Dr. Vaccari has already analysed in two recent articles [2] the reasons behind the low uptake rate of this voluntary measure (less than 10% of eligible cases are referred to the Pool) and how the Pool should be reformed to deal more effectively with the risks associated with connected pre-packs.

The Corporate Insolvency and Governance Act 2020, which came into effect on 25 June 2020 (‘the Act’), presented the perfect opportunity to deal with the issues associated with connected pre-packs. It is, however, disappointing to see that the Government and Parliament have turned a blind eye on connected pre-packs and have been deaf to the requests from the industry to make the referral to the Pool compulsory in these procedures.

The Act includes several measures that are likely to make the English framework more rescue-oriented and efficient, such as a new restructuring procedure and the ban on the enforceability of ipso facto clauses. Unfortunately, no ink was spilled for a very useful mechanism on the brink of collapse.

It is to be hoped that the Pool’s latest cry for help will not end up in being a late pious expectation of salvation by means of Parliamentary intervention. There are valid reasons to believe that such an intervention is forthcoming, as section 8 of the Act revives the Government’s power to review connected pre-packs and related instruments, included the Pool. This power, originally granted by the Small Business Enterprise and Employment Act 2015, lapsed in May 2020 but has now been extended to the end of June 2021.

The publications mentioned in this article are available on Westlaw, and Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.


[1] V Finch and D Milman, Corporate Insolvency Law: Perspectives and Principles (3rd edn, CUP 2017) 123.

[2] E Vaccari, ‘Pre-Pack Pool: Is It Worth It?’ (2018) 29(12) I.C.C.L.R. 697; E Vaccari ‘English Pre-Packaged Corporate Rescue Procedures: Is there a Case for Propping Industry Self-Regulation and Industry-Led Measures such as the Pre-Pack Pool?’ (2020) 31(3) I.C.C.L.R. 169.

The New Corporate Insolvency and Governance Act 2020 – An Extraordinary Act for Extraordinary Times? A Quick Look at the Act’s Time-Restricted Measures

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Dr. Eugenio Vaccari, Lecturer in Law, University of Essex

I. The Corporate Insolvency and Governance Act 2020

On 25 June 2020, the Corporate Insolvency and Governance Act 2020 (‘the Act’) completed its progress in the Parliament and received Royal Assent. The Act has unanimously been hailed by the insolvency community as the most significant regulatory reform in the United Kingdom in the past 20 years.

The Act represents the culmination of a debate on regulatory reforms commenced in 2016 and continued in 2018. This debate was made more urgent by the need not to fall behind the European Union and by the inadequacies of the system evidenced by recent corporate scandals (Carillion) and systemic failures (airline industry).

While some of the measures are the result of long-planned reforms the Government has previously consulted upon, some changes are temporary in nature and they are designed to provide companies with the breathing space and flexibility needed to deal with the economic impact of the Covid-19 pandemic.

This blog-post briefly discusses the relevance and impact of the time-limited measures introduced by the Act. The Act’s long-term regulatory reforms were discussed in a separate post here.

II. Time-Limited Measures

The most significant changes affecting insolvency rules are: (i) a suspension of statutory demands and restrictions on winding-up petitions;[1] (ii) a suspension of liability for wrongful trading;[2] and (iii) an extension to end of June 2021 to the power to legislate on sales to connected persons, which was granted by the Small Business, Enterprise and Employment Act 2015 (‘SBEEA 2015’) but expired in May 2020.[3]

The Act also allows for temporary flexibility regarding other administrative burdens, such as the holding of annual general meetings (AGMs) and filing requirements. These temporary measures, however, fall outside the remit of this blog-post as they do not deal with insolvency provisions.

With reference to statutory demands and winding-up petitions, the Coronavirus Act 2020 introduced a moratorium on commercial landlords to enforce the forfeiture of commercial leases for unpaid rent. This measure was designed to protect companies unable to trade during the lock-down period introduced by the Government to limit the spread of Covid-19.

However, landlords sidestepped this original ban by serving statutory demands on businesses followed by winding-up petitions. The Corporate Insolvency and Governance Act 2020 addresses this loophole by introducing temporary provisions to void statutory demands made between 1 March and 30 September 2020.

Statutory demands can still be served as this may trigger a termination clause under an existing contract. However:

  1. service of a statutory demand without the treat of a winding-up petition is of limited benefit;
  2. defaults in debtor’s facility documents or commercial contracts are usually equally triggered by ordinary as opposed to statutory demands;
  3. even if these clauses are triggered, the creditor might still not be able to enforce the termination as such option might be prevented by the newly enforced ban on ipso facto clauses discussed here.

The Act also restricts winding-up petitions based on statutory demands from 27 April to 30 September 2020. For the same period, it also prevents creditors from presenting a winding-up petition unless they have reasonable grounds to believe that: (a) the Covid-19 pandemic has not had a “financial effect” on the debtor company; or (b) the facts by reference to which the relevant ground applies would have arisen even if the Covid-19 pandemic had not had a financial effect on the company.

These temporary measures are intended to prevent aggressive creditor actions against otherwise viable companies that are struggling because of the consequences of the Covid-19 pandemic.

As mentioned before, creditors can still commence a winding-up petition if they prove that the Covid-19 pandemic had no “financial effect” on the debtor. This bar is very low, as in virtually all sectors of the economy the Covid-19 pandemic produced financial effects on the debtors. This is particularly true for the worst affected sectors, such as the airline industry, non-essential retail, hospitality and leisure sectors (where revenue has been nil or restricted as a result of the lockdown and social distancing measures). Still, creditors may be able to submit a winding-up petition based on aged and undisputed debts that pre-date the Covid-19 pandemic.

As for the suspension of liability for wrongful trading, the Act suspends the liability arising from wrongful trading (sections 214 and 246ZB of the Insolvency Act 1986) in the period 1 March to 30 September 2020.

Under wrongful trading provisions, directors face personal liability on debts incurred by their company. This is, if they decided to continue trading while they knew or ought to have known that the company was unlikely to avoid entering insolvent liquidation or administration. For directors who may have previously rushed to liquidate their businesses with these provisions in mind, this suspension should help delay that process.

III. Preliminary Assessment

There is no doubt that the Act complements the Coronavirus Act 2020 with a series of more measures designed to provide companies with the much-needed temporary relief to cope with the impact of the Covid-19 pandemic.

However, all that glitters is not gold.

With reference to the use of statutory demands and winding-up petitions, the Business Secretary originally advocated for the introduction of these measures to safeguard the UK high street against aggressive debt recovery actions during the Covid-19 pandemic (Alok Sharma, 23 April 2020). However, the temporary provisions as enacted are not sector specific. They apply to any registered or unregistered company that can be the subject of a winding-up petition. They also apply in relation to any debt owed by a debtor company, not just rent or other commercial lease liabilities. As a result, there is the risk that this temporary protection is used in a strategic manner by otherwise non-distressed firms as a leverage in negotiations with their creditors, in order to reduce outstanding and future liabilities arising from ongoing executory contracts.

Additionally, while the Act does not introduce a blanket ban on presenting winding-up petitions, the Government, some professionals and non-specialist publications are suggesting the contrary, thus causing potential confusion in the business community.

The Act also provides that if a winding-up order has been made in relation to a debtor in the period between 27 April 2020 and the day before the Act came into force, the order is void if it does not meet the new requirements for the making of an order. The retrospective nature of this provision can lead to significant challenges in practice. For instance, if the procedure has already commenced, it is not clear what happens to the debts incurred during the procedure, as they normally enjoy a super-priority status. However, it is expected that few orders were made on this basis in the past few weeks, as the judiciary was aware of the content of the Bill and enforced a ban on winding-up petitions before the Act was passed.[4]

Dr. Vaccari has already evidenced in a paper published by the University of Essex[5] and at the St Petersburg’s International Legal Forum the limits of the other, most significant temporary measures introduced by the Act, i.e. the suspension of liability for wrongful trading.

The comments made in the House of Lords debates indicate that the Government was aware of some of the limits evidenced in the above-mentioned papers. The Government stressed in these debates that its intention is that there should be no liability for wrongful trading until 30 September 2020. However, under the Act courts are only instructed “to assume that the [director] is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period”.[6] Therefore, applicants may still seem to have the power to demonstrate that the directors acted in breach of the wrongful trading provisions as outlined in sections 214 and 246ZB of the Insolvency Act 1986 for actions taken before the end of September of this year.

The Act does not affect the several other provisions. These include the rules on fraudulent trading[7] and transactions defrauding creditors,[8] on undervalue or preferential transactions,[9] as well as the director disqualification regime[10] and the general directors’ duties.[11] All these rules, therefore, continue to apply. Particularly, the common law duty of directors to give consideration to the interests of creditors when a company is in the zone of insolvency[12] is preserved and remains in full force.

Sections 12(3) and (4) of the Act clarify that the suspension of liability for wrongful trading does not apply to a variety of companies. These include (among others) insurance companies, banks (including investment banks and firms), building societies, friendly societies, credit unions, public-private partnership project companies and overseas companies with corresponding functions. In other words, a good deal of medium and large enterprises are excluded from the scope of this provision without any apparent justification.

Additionally, unlike the provisions on statutory demands and winding-up petitions, the rules on wrongful trading state that there is no requirement to show that the company’s worsening financial position was due to the Covid-19 pandemic. 

The Act adopts a blanket approach: liability for losses incurred in the relevant period is waived, irrespective of whether the losses are incurred because of the Covid-19 pandemic. This blanket approach raises issues of potential abuse of the law if the office holders cannot hold the directors accountable for losses that are not caused by the Covid-19 pandemic.

As a result of all these considerations (and the others mentioned in the publication cited above), a measure in theory designed to “remove the threat of personal liability” caused by the Covid-19 pandemic on businesses (Alok Sharma, 28 March 2020) is likely to lift significant restrictions on the arbitrary exercise of powers by rogue directors. This is likely to significantly and negatively affect creditors’ rights and the rule of law. It is highly unlikely that the suspension of liability for wrongful trading results in being a “jail-free card” (although it is salient to note that we are discussing civil, as opposed to criminal, liability issues).

A final contentious aspect is represented by the power granted to the Secretary of State to temporarily (for up to six months) amend corporate insolvency primary and secondary legislation and related measures to deal with the consequences of the Covid-19 pandemic on companies. This power is virtually unrestricted as no effective check-and-balance system is put into place.

IV. Concluding Remarks

The Act provides much-needed temporary relief for distressed companies.  However, given the speed with which the Act has been passed, the complexity of the legislation, and some questionable legislative choices, there are undoubtedly areas of ambiguity and potential challenge.

The extent to the Act will help companies navigate through the Covid-19 pandemic is far from clear. More importantly, the legislation, whilst very welcome for debtors, does not deal with the substantive problem of debt being built up and long-term balance sheet issues.

In fact, the Act provides no solution for debtors once the restrictions expire. At that point (end of September 2020), the debtors may have significant arrears of debt. These issues are particularly acute in those sectors of the economy that have been worst affected by the Covid-19 pandemic. As a result, these time-restricted measures may have the unintended effect of postponing the unavoidable, reducing returns to creditors and resulting in a spike of liquidation-oriented procedures in the last quarter of this year.

The publications mentioned in this article are available here, on Westlaw, and Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.

[1] Sections 10-11 of the Act.

[2] Sections 12-13 of the Act.

[3] Section 8 of the Act.

[4] Re A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch), [2020] 6 WLUK 13 – restraining the presentation of a winding-up petition against a company which had been unable to pay its rent as a result of the Covid-19 pandemic by taking into account the likelihood of the change in the law represented by the relevant provisions of the Corporate Insolvency and Governance Bill 2020.

[5] The paper makes reference to the Bill, but the wording of the relevant provisions has not changed in the Act.

[6] Section 12(1) of the Act.

[7] Section 213 of the Insolvency Act 1986.

[8] Section 423 of the Insolvency Act 1986.

[9] Sections 238 and 239 of the Insolvency Act 1986.

[10] As outlined in the Company Directors Disqualification Act 1986.

[11] Chapter 2, Companies Act 2006. These include the duties to act within their powers, to exercise independent judgement, to avoid conflicts of interest and to exercise reasonable care, skill and diligence.

[12] Section 172(3) of the Companies Act 2006.

The New Corporate Insolvency and Governance Act 2020 – An Extraordinary Act for Extraordinary Times? A Quick Look at the Act’s Long-Term Statutory Reforms

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Dr. Eugenio Vaccari, Lecturer in Law, University of Essex

I. The Corporate Insolvency and Governance Act 2020

On 25 June 2020, the Corporate Insolvency and Governance Act 2020 (‘the Act’) completed its progress in the Parliament and received Royal Assent. The Act has unanimously been hailed by the insolvency community as the most significant regulatory reform in the United Kingdom in the past 20 years.

The Act represents the culmination of a debate on regulatory reforms commenced in 2016 and continued in 2018. This debate was made more urgent by the need not to fall behind the European Union and by the inadequacies of the system evidenced by recent corporate scandals (Carillion) and systemic failures (airline industry). While some of the measures are the result of long-planned reforms the Government has previously consulted upon, some changes are temporary in nature and they are designed to provide companies with the breathing space and flexibility needed to deal with the economic impact of the Covid-19 pandemic.

This blog post briefly discusses the relevance and impact of the long-term regulatory reforms introduced by the Act. Time-restricted measures are discussed in a separate blog-post.

II. Long-Term Reforms

The most significant changes in the area are: (i) a short free-standing company moratorium;[1] (ii) a new restructuring plan procedure;[2] (iii) a general ban on the enforceability of ipso facto clauses.[3]

The moratorium gives struggling businesses a 20-business day opportunity to consider a rescue plan, extendable by the directors for a further 20 business days or, with creditor consent, up to a year.

The moratorium is triggered by the directors of the ailing company filing the relevant documents at court (out-of-court process) or by an order of the court following the debtor’s application (in-court process). The latter is of primary interest for overseas companies or where the debtor has been served with a winding-up petition.

The aim of the moratorium is to facilitate the rescue of the company (as opposed to the rescue of only the business) through a company voluntary arrangement (‘CVA’), a restructuring plan, an informal workout or another formal insolvency procedure (e.g. pre-packaged administration).

During this period, the company remains under the control of its directors (debtor-in-possession procedure), but there are restrictions on the transactions that the companies can complete during a moratorium. For instance, new security can only be granted with the monitor’s consent and if they think the grant of the security will support the rescue of the company. Disposal of company’s property is only admissible if it is made in the ordinary course of business, with the monitor’s consent or following a court order. Other restrictions apply to loans of more than £500, certain transactions (e.g. collateral security) and payments for pre-moratorium debts.

No legal action can be taken against the debtor’s assets without leave of the court. There can be no enforcement of security (except financial collateral or collateral security charges) and no repossession of goods under hire-purchase agreements or retention-of-title clauses. In addition, during a moratorium, the holder of an uncrystallised floating charge on the property of the company is prohibited from giving notice which would have the effect of either (i) causing the floating charge to crystallise; or (ii) restricting the disposal of the property of the company. All these restrictions provide debtors with powerful tools to continue trading normally during moratorium.

Similar to what happens in other insolvency procedures (including the new restructuring plan), landlords cannot exercise their rights of forfeiture and may be forced to accept a reduction in their rents. This raises concerns that other landlords will follow Intu Group into administration procedures because the reduced rents (if and when paid) would be insufficient to meet their long-term liabilities.

The moratorium process is overseen by a monitor who must be a licenced insolvency practitioner (‘IP’). During this process:

  1. the monitor must remain of the view that a rescue of the company as a going concern is possible, otherwise the moratorium must be brought to an early termination;
  2. certain pre-moratorium debts are subject to a “payment holiday”;
  3. other pre-moratorium debts and all debts incurred during the moratorium must be paid in full as they fall due (or even earlier in case of pre-moratorium debt subject to acceleration).

In particular, the debtor must continue to pay certain of its debts, including new supplies and rent in respect of the moratorium period, as well as amounts due under financial contracts.

Financial contracts usually include acceleration clauses that are triggered by any insolvency event, including the moratorium described above. The early version of the Bill granted super priority status to these debts, if the debtor entered into an insolvency proceeding shortly after the moratorium. Amendments in the House of Lords removed the super priority status to the accelerated portion of these debts. At the same time, financial lenders can still accelerate the payments of these debts, causing the early termination of the moratorium and the rescue attempts because financial debts are not subject to a payment holiday.

Debts incurred under the moratorium are given priority ranking if the debtor falls into a formal insolvency procedure within 12 weeks from the end of the moratorium. The Act provides for the right to challenge the monitor’s or the directors’ actions, decisions or failure to act on the grounds of (actual or prospective) unfair harm to the applicant. There is also a right for a subsequently appointed office holder to challenge the monitor’s remuneration as excessive. Finally, the Act creates new offences of fraud during, or in anticipation of, a moratorium and false representation to obtain a moratorium.

The restructuring plan procedure is a powerful and flexible court-supervised restructuring process. This debtor-in-possession procedure allows struggling companies, or their creditors or members, to propose a new restructuring plan to rescue the company or part of its business, enable complex debt arrangements to be restructured and support the injection of new rescue finance.

The court involvement is limited to two hearings. In the first one, the courts are asked to convene the meeting and examine the proposed class composition. In the second hearing, the courts sanction the vote and approve the plan if the statutory conditions for approval are met and if it is just and equitable to do so. The sanctioned plan is binding on both secured and unsecured creditors.

The restructuring plan procedure is available to all companies that are encountering, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern.[4] There is, therefore, no need for the debtor to be insolvent. As long as there is some form of compromise or arrangement to deal with the company’s financial difficulties, the plan is virtually a blank canvas.

Such procedure is modelled after the successful schemes of arrangement.[5] For the plan to be approved, it must receive the assent of 75 percent in value of each class of creditors. It is salient to note that two requirements applicable to schemes and CVAs have not been replicated with reference to the new restructuring plan procedure, thus making it easier to achieve the requisite majority. These are the requirements that more than half in value of unconnected creditors and that the majority in number vote in favour of the plan.

To further facilitate the approval of the plan, the new restructuring procedure features a cross-class cram-down. The cram-down mechanism allows dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure. The plan, however, needs to have received the assent of at least one class of creditors who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.

The House of Lords’ removal of the protections initially included for creditors with aircraft-related interests means that that they can be compromised by a scheme or restructuring plan. This is welcome news for the distressed airline industry, which can now make use of those processes.

The new restructuring plan procedure is a more powerful and flexible mechanism than the existing schemes and CVAs. Unlike CVAs, it can bind secured creditors and creditors’ rights are not diluted, as they vote in classes of uniform interests rather than as a whole. Unlike schemes, dissenting classes can be bound by the plan. Additionally, the majority threshold is lower compared to the analogous requirements for the approval of schemes and CVAs.

The Act also widens the scope of the restriction on the enforceability of termination clauses from essential suppliers (sections 233-233A of the Insolvency Act 1986) to all kinds of suppliers. This measure applies where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis. As a result of this, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or doing “any other thing” such as varying the contract terms with the company (for example: increasing the price of supplies), because the debtor becomes subject to a relevant insolvency procedure. Suppliers are also banned from insisting on payment of sums falling due prior to the insolvency as a condition of continued supply. The Government granted a wider protection than other jurisdictions (namely, the USA and Australia) by extending the ban to the termination of a contract or supply to breaches which occurred prior to the relevant insolvency procedure.

The customer is required to pay for any supplies made once it is in the insolvency process. The measure contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. Suppliers also retain the power to terminate these contracts for breaches that occurred after the commencement of the insolvency procedure and – in any case – with the permission of the office holder or director (depending on the procedure).

Up until 30 September 2020, small suppliers are exempt from the proposed changes and can (if they choose) terminate the supply contract. This is a temporary exemption designed to address the current difficulties faced by UK companies as a consequence of the Covid-19 pandemic, while permanent exclusions apply for the benefit of certain financial contracts and institutions.

III. Preliminary Assessment

There is no doubt that the Act represents a significant, much-needed overhaul of the English corporate insolvency framework. It is most likely that the reforms briefly described in this blog will enhance the corporate rescue attitude of the English framework; the attractiveness of this system for foreign enterprises; as well as the country’s standing in the Doing Business Report, particularly with reference to the “Resolving Insolvency” indicator.

However, all that glitters is not gold.

With reference to the company moratorium, while it provides a payment holiday for certain types of pre-moratorium debts, its scope does not extend to loans, liabilities arising under a contract/instrument involving financial services, as well as rents, wages, salaries and redundancy payments. The carve-out of such debts means that a company could still require access to significant funds during a moratorium. As a result, the moratorium could be of limited use where the company is subject to significant financing arrangements for which a payment holiday is not granted.

Another significant carve-out is with reference to the “rent in respect of a period during the moratorium”. However, this could lead to strategically timed moratoria, especially if the rent is payable in arrears (which is frequently the case in commercial contracts). In this case, the debtor might file soon after the quarterly payment for the pre-moratorium period is due. In this way, the debtor would avoid making any rent payment for the pre-moratorium period and would postpone any rent payment for the moratorium period for another four months.

The absence of any super-priority status of funding provided during the moratorium and the possibility for lenders to accelerate their debt in a moratorium may present serious obstacles to the use of such procedure by distressed companies (even if the House of Lord removed the super-priority status for accelerated financial debts, as outlined above).

With reference to the restructuring plan procedure, valuation will be a key aspect in the new process, as it will play a pivotal role to address any complaints from crammed down creditors as well as to assess which creditors are out of the money and can be excluded from the voting process. However, as Dr. Vaccari evidenced in two previous papers,[6] valuation is an extremely controversial process.

There is also the risk of reverse cram-down, or “cram-up”. This is when the restructuring plan procedure is used in a strategic manner by junior classes of creditors and/or the company’s members to “impose” a plan on dissenting senior creditors. Courts could in theory discourage this practice by not sanctioning plans that are not “just and equitable”. However, English courts have proven reluctant to interfere with business judgments. Additionally, the absence of any absolute priority rule – which was nevertheless touted when the reforms were first announced in August 2018 – may further promote a liberal judicial approach in the sanctioning hearing.

With reference to termination clauses, the Act provides no definition of what “hardship” and “any other thing” mean. Hardship is the major exclusion that suppliers can invoke to terminate a contract. “Any other thing” refers to the actions that suppliers are banned to take because the debtor entered into a relevant insolvency procedure. These are key concepts and the lack of statutory guidance on them is likely to represent an area of future dispute to be resolved by the courts.

The new discipline of termination clauses applies to the relevant insolvency procedures commenced on or after the day on which the Act came into force (27 June 2020). As a result, they will apply in respect of contracts entered into before as well as after that date, with the result of significantly restricting (for pre-Act contracts) the autonomy of the signatory parties as well as the predictability of such contracts. This vulnus to the principle of freedom of contract is particularly striking and surprising, considering that the latest changes to termination clauses introduced by the SBEEA 2015 apply to contracts entered into or after the date in which the SBEEA 2015 entered into force (1 October 2015).

To conclude on this topic, the Government introduced a long list of excluded companies and particular types of contracts. The latter include certain financial institutions and various financial and capital-markets contracts. Critically, these broad exclusions capture lending contracts, with the result that there is no obligation to continue to supply finance to companies in a relevant insolvency procedure.

IV. Concluding Remarks

There is no doubt that the Corporate Insolvency and Governance Act 2020 represents the most significant reform of the English corporate insolvency framework since the reforms introduced by the Enterprise Act 2002. As evidenced in this blog paper, the Act provides very useful additions to the restructuring toolkit and much-needed temporary and long-term relief for distressed businesses.

However, given the speed with which the Act has been passed, the complexity of the legislation, and some questionable legislative choices, there are undoubtedly areas of ambiguity and potential challenge. It is far from clear to what extent the Act will make the English framework more flexible, efficient and resilient to sudden changes of the economic environment.

The publications mentioned in this article are available on Westlaw, and Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.

[1] Sections 1-6 of the Act.

[2] Schedule 9 of the Act.

[3] Sections 14-19 of the Act.

[4] Schedule 9 of the Act.

[5] Part 26 Companies Act 2006.

[6] E Vaccari, ‘Broken Companies or Broken System? Charting the English Insolvency Valuation Framework in Search for Fairness’ (2020) 35(4) JIBLR 135; E Vaccari, ‘Promoting Fairness in English Insolvency Valuation Cases’ (2020) 29(2) Int. Insolv. Rev. 1.

Is (More) Fairness Needed in the English Insolvency Framework?

Image by Sasin Tipchai

Dr. Eugenio Vaccari, Lecturer in Law, University of Essex recently published an article in the Journal of International Banking Law and Regulation (Volume 35, Issue 4, pp. 135-147).

The publication, titled ‘Broken companies or broken system? Charting the English insolvency valuation framework in search for fairness’, adopts a normative approach to investigate the measurement of value in English insolvency and bankruptcy cases.

In the article, the most commonly used (by courts and practitioners alike) valuation techniques are assessed against a revised communitarian, fairness-orientated framework. Such framework is based on a modified version of Rawls, Finch and Radin’s social justice concepts of fairness.

Asking questions about fairness and fair value in insolvency is particularly important due to a variety of factors. These include the increased complexity of valuation cases, where intangible assets such as cryptocurrencies and intellectual property rights feature with increasing prominence and frequency. They also include the need to counteract the increasing risks of conflict of interests with some of the parties involved in these procedures, particularly in rescue proceedings.

Answering questions about fairness in valuation cases can no longer be avoided due to the public outcry associated with the use of certain corporate insolvency procedures such as pre-packaged administrations to connected parties or company voluntary arrangements by large retailers to avoid or significantly reduce rents.

Dr. Vaccari’s article investigates the structural components of the notion of fairness, explains the need for a revised communitarian, fairness-orientated framework to measure value in insolvency, and suggests how this could be implemented in practice.

The publication is available on Westlaw, and Dr. Vaccari regularly discusses insolvency matters on Twitter (@eugevaccari86) and LinkedIn.

Corporate Social Responsibility as Obligated Internalisation of Social Costs

Dr Onyeka Osuji, Reader in Law at the University of Essex, recently co-authored a paper on ‘Corporate Social Responsibility as Obligated Internalisation of Social Costs’ together with A Johnston, K Amaeshi, and E Adegbite.

The authors propose that corporations should be subject to a legal obligation to identify and internalise their social costs or negative externalities.

Their proposal reframes corporate social responsibility (CSR) as obligated internalisation of social costs and relies on reflexive governance through mandated hybrid fora.

The authors argue that their approach advances theory, as well as practice and policy, by building on and going beyond prior attempts to address social costs, such as prescriptive government regulation, Coasian bargaining and political CSR.

The paper was published open access on 1 November 2019 in the Journal of Business Ethics here.

The Responsibility of Corporations under International Law: Essex Academic Presents at the Urban Morgan Institute for Human Rights

Dr. Tara Van Ho, Lecturer in Law at the University of Essex, spoke on the responsibility of corporations under international law at the 40th anniversary celebrations of the Urban Morgan Institute for Human Rights at the University of Cincinnati School of Law in the US.

Dr. Van Ho, a co-President of the Global Business and Human Rights Scholars Association, was asked to discuss the international legal standards relevant to addressing business impacts on human rights.

After outlining the expectations in the UN Guiding Principles on Business and Human Rights, currently the most authoritative statement on the issue, Dr. Van Ho focused on the difficulty victims face in securing remedies. These include, but are not exclusive to, states that are unwilling and unable to ensure victims can hold corporations accountable and complex corporate structures that limit the ability of victims to pursue people abroad.

When states like the US take administrative action to sanction businesses, the fines paid rarely go to support the victims but instead benefit the treasury of the enforcing state. There is room for hope, however. As Dr. Van Ho explained, businesses can embed respect by human rights by ensuring they speak about human rights responsibilities, empower employees and others to raise concerns through independent grievance and complaint mechanisms, and ensuring their incentive structures encourage managers and employees to take human rights seriously. This has been done successfully by some businesses. 

The Urban Morgan Institute is the oldest endowed human rights centre at a law school in the world. There is a rich history of collaboration between Essex and Cincinnati.

The Urban Morgan Institute houses the Human Rights Quarterly, the world’s leading interdisciplinary journal on human rights, which has provided a venue for research works from several Essex faculty members.

The Essex Human Rights Centre‘s first director, Kevin Boyle, and the Urban Morgan Institute’s Director for its full 40-year history, Bert Lockwood, were long-term friends and colleagues. Professor Lockwood served as a visiting lecturer at Essex for a year when Professor Boyle was asked to serve at the UN.

A few years later, the late Sir Nigel Rodley, the long-term Chair of the Essex Centre, visiting Cincinnati to receive the Butler prize for his work on human rights and to deliver a speech on the prohibition of torture.

Dr. Van Ho is a graduate of the educational programmes at both centres. 

Hierarchy of Legislated Corporate Social Responsibility, Supply Chains and Assumptions in Mandatory Modern Slavery Disclosure

Dr Onyeka Osuji, Reader in Law at the University of Essex, recently presented his research on mandatory modern slavery disclosure at two international conferences.

Disclosure is an emergent regulatory strategy for corporate social responsibility (CSR) in certain jurisdictions despite its original conception as a voluntary management tool. As exemplified by recent anti-modern slavery legislations in some jurisdiction, disclosure is growing in significance and reach. In extending social responsibility to global supply chains, disclosure regulation implicitly references ideas of gatekeeper responsibility and glocalisation and overcomes the extraterritorial limitations of substantive regulation.

Anti-modern slavery legislations by California in 2010, the UK in 2015 and Australia in 2018 reflect the regulation by information approach based on a universal revenue threshold. The goal of the regulatory strategy appears to be two-fold. On the one hand, disclosure requirements may promote the awareness of modern slavery and encourage businesses to eliminate or reduce its existence in their operations, supply and purchasing chains. On the other hand, information generated through reporting requirements will be used by stakeholders like consumers and investors factor in purchasing and investment decisions. This market-based approach indirectly relies on stakeholder pressure to compel businesses to address modern slavery.

This research examines the underlying assumptions for disclosure-oriented modern slavery legislations. These assumptions include leverage and political CSR, adequacy of a revenue threshold test for the capacity to confront modern slavery in operations, supply and purchasing chains, business case justifications for CSR, and an activist and vibrant stakeholder group of investors, consumers and civil society.

The paper demonstrates the various limitations of the disclosure regulatory strategy of the modern slavery legislations and argues that it is at the lowest end of a hierarchy of effective legislated CSR. Alternative thresholds, including sector-based and regional approaches, may reflect the degree of risk and need for awareness and therefore approximate to the contextual understanding of CSR and its priorities. The reliance on the market-based reputation and stakeholder information regulation excludes direct positive and negative incentives for compliance. It may encourage symbolic statements of corporate policies and processes rather than substantive compliance and quality reporting of steps undertaken to reduce risks. The lack of provisions for monitoring, verification and enforcement and for responsibility, liability and accountability creates the potential for a “promise-performance gap” exemplified by deceptive and misleading statements.

This research was presented at the 18th International Conference on Corporate Social Responsibility (CSR) and 9th Organisational Governance Conference ‘CSR: Public and Private Perspectives’, Barcelos, Portugal (10-13 September 2019) and at the one-day conference ‘Critical Perspectives on “Modern Slavery”: Law, Policy and Society’, organised by the Wilberforce Institute for the Study of Slavery and Emancipation, University of Hull (30 October 2019).

Cross-Border Mergers in the EU: Shareholders’ Derivative Suits Against Corporate Directors

Dr Georgios Zouridakis, Lecturer in Law at the University of Essex, has published a new chapter in the edited collection Cross-Border Mergers: EU Perspectives and National Experiences (Springer 2019).

Dr Zouridakis’ study shows that shareholders championing corporate interests may face several obstacles following cross-border mergers within the EU, depending on whether the suit is temporally prior to the merger or vice versa. The fact that, post-merger, the company ceases to exist (and is succeeded by another entity in another jurisdiction), gives rise to issues regarding the application of rules intrinsic to the mechanics of derivative suits and particularly those on: continuous ownership; contemporaneous ownership; costs; and on the requirement for shareholders to first demand the board to take action.    

Given that the derivative suit, in all its variations, is a form of shareholder-led representative action, provided by most European countries – and often the only such available – this chapter argues in favour of a policy facilitating such shareholders’ enforcement of corporate claims in the cross-border merger context. 

Dr Zouridakis’ chapter is included in the collection Cross-Border Mergers, which was edited by Dr. Thomas Papadopoulos and published by Springer in October 2019.

This edited volume focuses on specific, crucially important structural measures that foster corporate change, namely cross-border mergers. Such cross-border transactions play a key role in business reality, economic theory and corporate, financial and capital markets law. Since the adoption of the Cross-border Mergers Directive, these mergers have been regulated by specific legal provisions in EU member states.

This book analyses various aspects of the directive, closely examining this harmonised area of EU company law and critically evaluating cross-border mergers as a method of corporate restructuring in order to gain insights into their fundamental mechanisms. It comprehensively discusses the practicalities of EU harmonisation of cross-border mergers, linking it to corporate restructuring in general, while also taking the transposition of the directive into account.

Exploring specific angles of the Cross-border Mergers Directive in the light of European and national company law, the book is divided into three sections: the first section focuses on EU and comparative aspects of the Cross-border Mergers Directive, while the second examines the interaction of the directive with other areas of law (capital markets law, competition law, employment law, tax law, civil procedure). Lastly, the third section describes the various member states’ experiences of implementing the Cross-border Mergers Directive.

Essays for sale? ‘Misleading’ essay writing ad banned by the ASA

Dr. Alexandros Antoniou, Lecturer in Media Law, University of Essex

On 11 September 2019, the Advertising Standards Authority (ASA), the UK’s advertising regulator, found that claims on the website of an essay writing service lacked adequate substantiation and breached the Authority’s rules on misleading advertising.

What was the ad about?

The ASA’s remit includes, since 2011, claims made by companies on their own websites and in social media spaces under their control. The contested advertisement appeared on the website, which included on its home page the following text:

EXCELLENCE BEGINS HERE… There [sic] no better place than to get the best academic help. Professionals [sic] Assistance by highly qualified experts… FIRST ORDER DONE FOR FREE*

Services listed on the website included assignments and dissertations for several subjects including law, engineering and marketing. Further text read:

Quality Essays We don’t offer plagiarized or duplicate essay content. Our content is 100% original. Quality is what comes first for us.

Under the page titled ‘Essays’, additional text included the following statements:

Best Essays by Oxford and Cambridge Experts… We provide accurate and possibly best essays that are of highest standards. Our expert essayists make sure that they deliver you a first-rate quality of essay…

A disclaimer available on the website read in smaller text: is offering services pertaining to editing, proofreading, formatting and consultation through its website while ensuring to comply with the laws and ethical norms of the industry. We do NOT [emphasis in the original] own any work given to us by clients. We do not offer any sort of writing services.

What were the regulatory issues raised?

One complainant challenged whether the statement ‘FIRST ORDER DONE FOR FREE*’ could be substantiated. Additionally, the ASA felt there were reasons for further investigation and queried whether the claim ‘best essays by Oxford and Cambridge experts’ could also be adequately substantiated and whether the website misleadingly implied that students could submit an essay they had bought as their own.

What was the ASA’s decision?

First of all, advertisers are required under the ASA’s Non-Broadcast Advertising Code (CAP Code) to address the regulator’s enquiries without delay. In an apparent disregard for the Code, provided no response. This resulted in a finding of breach of Rule 1.7 of the CAP Code (unreasonable delay).

Second, the ASA upheld the single complaint against the ad because it found no evidence that the claim ‘first order done for free*’ was a genuine offer. The statement on the website did not include any information about how to obtain the ‘free’ order, nor did it identify any further limitations or qualifications attached to it. As such, it failed to clarify the extent of the commitment the consumer must make to benefit from a free offer in breach of Rule 3.23 of the CAP Code.

Third, the ASA challenged the statement ‘Best Essays by Oxford and Cambridge Experts’. This was sensibly taken to imply that students who selected this essay writing service would receive high-quality essays from individuals who had attended prestigious Oxbridge institutions. Although this claim was likely to be regarded by consumers as objective, no evidence was provided whatsoever by to substantiate it. As a result, the ASA found that it violated its general principle under Rule 3.1 of the CAP Code, which requires advertisers to avoid including materially misleading statements in their commercial messages.

Last but not least, the regulator took issue with’s claims that the essays would be plagiarism-free. It considered that students likely to read them would understand that they could purchase and submit essays as their own without any consequences. The website did not, however, make clear that this was not the case and as such, it was found to have mislead consumers by omitting material information in breach of Rule 3.3 of the Code. The ASA also noted that the disclaimer provided was ‘insufficient’ to neutralise the unsubstantiated claims about non-plagiarised professionally written essays. The regulator concluded:

We told [] not to use the claim ‘best essays by Oxford and Cambridge experts’ and not to imply that students could submit an essay that they bought as their own without risks.

This is not the first time the ASA has grappled with claims made by essay writing companies. In 2013, the Authority ruled that had breached its CAP code by offering a money-back guarantee that customers would receive ‘at least the grade they ordered’. Commissioning custom essays is a rapidly growing problem, which the higher education sector and legislation has been slow to address. Also known as ‘contract cheating’, this practice compromises the fairness of the assessment process and presents a real threat to academic integrity. A study conducted by Swansea University found that one in seven students globally is believed to have paid for someone to produce their assignment, ‘potentially representing 31 million students around the world’.

Offering a product which (the presence of disclaimers notwithstanding) can be used for the purposes of cheating in a programme of study is not compliant with the ASA’s core principle, which requires marketing communications to be ‘legal, decent, honest and truthful.’ The UK Advertising Code will not, however, apply to non-UK based websites offering custom essay writing services. This approach may have limited impact considering that many of these websites are based overseas (and are thus beyond the ASA’s jurisdiction). Nevertheless, the ASA’s ruling is a useful reminder that providers’ unsupported claims that their essays are ‘100% original’ or ‘100% plagiarism free’ are misleading and far from honest. Although such an advertised essay may not include any plagiarised text per se, submitting it and representing it as the student’s own work can amount to an act of plagiarism, which is a serious academic offence.