July 9th, 2020 / Insight posted in Legal

The corporate insolvency and governance act

The most significant change to the UK’s insolvency regime since the Enterprise Act 2002 was introduced by the UK government on 20 May 2020.  The Corporate Insolvency and Governance Act 2020 received Royal Assent on 25 June 2020 and most provisions came into force on the 26 June 2020.

The Act was brought into law quickly to bring about changes seen as necessary to support the UK’s struggling businesses as they deal with the economic fallout caused by the Coronavirus pandemic.

Some of the measures contained in the Act have been under development for years (since at least 2016) and will be permanent. Others have been introduced specifically to cater for the current Coronavirus crisis. Some of the measures will only apply for an initial temporary period, but the government retains the power to extend these periods if necessary with the backing of parliament.

The permanent measures are in three key areas:

  • Moratorium – against legal action in the allotted time period without leave of the court
  • Restructuring plan – an opportunity for businesses to propose an alternative rescue plan
  • A ban on the operation of termination provisions (or so called ipso facto clauses).

The temporary measures (now until 30 September 2020, and the legislation gives powers to extend further):

  • ‘Suspension’ of wrongful trading
  • Prohibition on presenting winding-up petitions, serving statutory demands and making winding-up orders (where financial difficulties are attributable to Coronavirus pandemic)
  • Extension of time filing certain documents at Companies House.

We provide a brief summary of the measures below.

Moratorium

The moratorium will give struggling companies a 20 business-day opportunity to consider a rescue plan, extendable by the directors for a further 20 business days or with creditor consent for up to a year. The company will remain under the control of its directors during the moratorium, and no legal action can be taken against a company during this period without leave of the court. The process will be overseen by a monitor who must be a licensed insolvency practitioner.

Restructuring plan

The restructuring plan will allow struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue. The plan will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.

While the restructuring plan is similar to a scheme of arrangement, the main difference is that it will introduce a cross-class cram-down. This will allow 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 will be no worse off than if the company entered an alternative insolvency procedure.

Ban on termination provisions (ipso facto clauses)

The Act introduces a permanent change to the use of termination clauses in supply contracts. As a result of the measure, where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or vary the contract terms with the company (for example, increasing the price of supplies). The customer is required to pay for any supplies made once it is in the insolvency process, but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.

‘Suspension’ of wrongful trading

The Act temporarily amends the wrongful trading regime such that the court, in assessing whether a director should make a contribution to the assets of the company under the wrongful trading provisions, is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors between 1 March 2020 and 30 September 2020 (this period could be extended). While directors may not be liable to contribute to the losses in this period, losses incurred in the periods before and after Coronavirus still remain a factor.  Also, directors may still be subject to action for other breaches of duties during the Coronavirus period.

Prohibition on presenting winding-up petitions, serving statutory demands and making winding-up orders

The Act plans to temporarily remove the threat of statutory demands and winding-up proceedings where unpaid debt is due to Coronavirus. Statutory demands will be void if issued against a company between 1 March 2020 and 30 September 2020 (the relevant period). Winding-up petitions presented during the relevant period that claim that a company is unable to pay its debts will be reviewed by the court to determine the cause of non-payment.  If the company cannot pay its debts because of Coronavirus, no winding-up order will be made.

Filing extensions

The Act will grant a temporary extension of the period within which a public company has to file its annual accounts and reports at Companies House, and give powers to the Secretary of State to temporarily grant further extensions to certain filing deadlines as are required.

How we can help

We have been guiding directors through the minefield of questions and worries they have at this time, preparing them to restructure their business for the ‘new normal’, whatever that may look like. In every instance, we provide valuable support to business owners and directors. We help alleviate the stress. We are dealing daily with creditors, landlords and staff.