The Corporate Insolvency and Governance Act 2020 (the Act) received royal assent on 25 June 2020 and is now in force.
The current COVID-19 pandemic has placed a lot of companies registered in England and Wales into a position where they are now either balance sheet or cash flow insolvency or both. The loss of these companies to the economy would be catastrophic and as a result the UK Government started the Bill's passage through parliament on 3 June 2020. The Act is not perfect and there will be teething problems as we get to grips with its practical effects but its main aim is to provide companies with additional tools and breathing space to see them through their current financial difficulties and designed to provide short term relief from the effects of coronavirus.
The Act deals with both temporary measures that are necessary and linked to the COVID-19 pandemic as well as permanent measures. By way of outline, the various measures are set out below:
1. Wrongful trading - Sections 12 and 13
Wrongful trading is when a director has been trading whilst a company is insolvent and has worsened the position for the company's creditors. In pre-COVID times a director could be found liable for the increase in creditor liability from the point of insolvency to the point an insolvency process was instigated and an insolvency practitioner appointed. The Act will reduce this liability and will assume that the director is not responsible for the worsening of the financial position of the company or the creditor position during the period 1 March 2020 to 30 September 2020.
2. Statutory demands and winding up petitions - Sections 10 and 11 and Schedule 10
These are actions taken by creditors to place a company into liquidation. The intention is to allow companies breathing space and prevent the threat of winding up proceedings being used as an aggressive debt collection tool and encourage communication and negotiation between parties.
The Act places a prohibition on petitions being prosecuted solely based on statutory demands served on debtors between 1 March 2020 and 30 September 2020. NB: We will shortly be providing an update to this note in light of the recent legislative changes regarding winding up petitions.
Further, the Act places a further hurdle on the creditor to set out clearly in any petition that (1) coronavirus has not had a financial effect on the company, or (2) the facts by reference to which the relevant ground to present a petition applies would have arisen even if coronavirus had not had a financial effect on the company. This requirement has retrospect effect from 27 April 20220 until 25 July 2020 and applies to both unregistered and registered companies. Any petitions that have been presented after 27 April but before the Act came into force, 25 June 2020 and the creditor cannot show that either of the two conditions can be met then the court will make such order to restore the company to the position it would have been if the petition had not been presented. This could have serious cost consequences for a creditor who has advertised the petition and caused the company loss.
Any winding up orders made between 27 April 2020 to 30 September 2020 which would not have been made if the Act was in force are void and the court may give such direction as it thinks fit for the purpose of restoring the company to which the order relates to the position it was in immediately before the petition was presented.
If a petition is presented then a company is not restricted in the disposition of its assets from the date of the presentation of the petition as it would have been pursuant to section 127 of the Insolvency Act 1986, instead the restriction only applies from the date a winding up order is made. This applies to petition presented between 1 March 2020 and 30 September 2020.
3. Corporate governance - Sections 20 to 42 and Schedule 14
These sections gives the secretary of state the power to make further regulations around corporate governance, as required, to help companies to initiate an insolvency process (such as for example holding AGMs and passing resolutions). This changes are only intended to have a six month lifespan from the date they are implemented. The Act also provides extensions of time to the period for filing accounts, to be extended to 30 September 2020 in certain circumstances.
1. New restructuring moratorium - Sections 1 to 6 and Schedules 1 to 8
This will fit in alongside the current administration regime and provide a light-touch option to give company's time to prepare restructuring proposals by preventing creditors from taking enforcement/recovery proceedings to and provide time for the company to be rescued.
- Is not applicable to companies already subject to certain insolvency procedures or a moratorium or has been subject to either in the last 12 months.
- There is a list of companies in Schedule ZA1 which are ineligible for this moratorium which in general terms are financial institutions.
- The moratorium can be used when a winding up petition has been presented or for overseas companies.
- The moratorium will come into force once relevant documents are filed at court.
- Once the moratorium comes into force the directors will remain in charge of the company but supervised by an insolvency practitioner for up to 20 days with the option of extending this term with or without creditor consent or by way of a court application.
- The company must display a notice at its premises, website and in any business document that it is subject to a moratorium and the name of the insolvency practitioner monitoring the company.
- The moratorium will prevent creditors from taking recovery action against any of the debtor company's assets (this includes landlords right of forfeiture and floating charge holders) and will also prevent the appointment of administrators by a qualified floating charge holder or by way of a creditor's administration order.
- Any company seeking credit over £500 during the moratorium must inform the lender of the moratorium.
- A company can only grant security over its property with the consent of the insolvency practitioner monitoring the company.
2. The new restructuring plan - Sections 7 to 9 and Schedule 9
This sits alongside and assists the new restructuring moratorium and amends Part 26 of the Companies Act 2006. The Act sets out the procedure for preparing a binding restructuring plan during the moratorium which includes amending how meetings are held. It incorporates principles seen in CVAs, schemes of arrangement and sanctioned arrangements and will apply to companies that are in or are likely to face financial difficulties. It requires at least 75% in value of creditors (or class of creditors) present and voting to pass the proposal for the court to consider approving it.
3. Ipso facto / termination clauses - Sections 14 to 19 and Schedule 12 and 13
The intention behind this amendment is to ensure a continuity of supply to encourage companies more of a chance to rescue their business.
The termination clauses that would usually be triggered on an insolvency event in contracts for the supply of goods and services will cease to have effect once the company enters an insolvency procedure and will not be exercisable for the period the company is in an insolvency process. A supplier can however terminate the contract with the consent of the company or any insolvency practitioner appointed as office-holder or on an application to the court. That said and if permitted by the contract, the supplier will still be able to terminate contracts for other breaches.
These provisions will not apply to small suppliers between 25 June 2020 and 30 September 2020. Small suppliers must show that two of the following conditions are met within the most recent financial year:
- Turnover not more than £10.2 million
- Balance sheet not more that £5.1 million
- Employees do not exceed 50
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.