6th July 2020
The Corporate Insolvency and Governance Act 2020 (the Act) came into force on 26th June 2020. Having been published on 20th May, it speeded through parliament and received Royal assent on 25th June. It is designed to help businesses in difficulty that need to restructure, to increase their chances of survival during these turbulent times.
Whilst wide-ranging reform of the insolvency legislation had been planned for some time, the unprecedented challenges caused by the COVID-19 pandemic forced the government to bring the timetable forward and significantly condense a process that would normally take over a year into just a matter of weeks.
The resulting Act contains both temporary and permanent legislation that should support a culture of business rescue and restructuring during the current unusual times and beyond.
It should be noted, that given the speed with which the legislation was pulled together, the government has made it clear that it is likely to remain a work in progress with additions, amendments and corrections expected over time. Furthermore there are a number of areas where the government appears to have left it to the Courts to resolve any issues which are not made clear by the new legislation. Therefore trade creditors, landlords, lenders and directors will all need to take advice on their respective positions when operating with businesses in distress during the next few months.
We’ve summarised the key elements of the Act below – full details can be seen here.
- Allows directors of a struggling company (some companies, such as financial services firms, are excluded) to create a protective breathing space while they attempt to put a restructuring/turnaround plan together
- Known as a “debtor in possession” procedure, the directors remain in control, although their actions are overseen by a “monitor” who must be a licensed Insolvency Practitioner. The monitor’s role is to assess the viability of the plan as well as providing a safeguard to ensure that the directors are acting in the creditors’ interests generally
- The moratorium lasts for 20 business days and can be extended by a further 20 by the directors or up to a year if creditors or the Court agree
- No legal action can be taken while the moratorium is in force but costs incurred during the moratorium period have to be paid
- Whilst it is intended to be a survival tool by giving directors control, there is no requirement to seek the prior approval of a secured creditor such as a bank or asset-based lender. The bank’s security cannot ultimately be prejudiced and they would still have the right to enforce their security should they wish after the moratorium has expired, but there may be concerns that they could be excluded from key strategic decisions
- Note that companies subject to some form of insolvency procedure in the previous 12 months (for example a company already in a CVA) cannot apply for the moratorium. Companies subject to a Winding Up Petition can still use the moratorium process, but only if they obtain an order from the Court first
- A company considering whether to propose a CVA to creditors can use the moratorium process as protection while preparing for a CVA. This is new as previously there was no interim protection for companies that intended to propose a CVA
- As soon as is reasonably practicable, all creditors of the company must be notified of the existence of the moratorium and a notice of the moratorium must be displayed on the company’s website, documents and business premises
- There are restrictions on payment of liabilities incurred prior to the moratorium and disposals of property during the period
- The new legislation allows a company in difficulty, or its creditors or members, to propose a restructuring plan, similar to the existing Scheme of Arrangement, as an alternative rescue option
- Provided a Court approves the plan as being fair and equitable and ensures creditors are no worse off than the next best alternative then it will bind both secured and unsecured creditors (unlike a CVA), including dissenting classes of creditors and members – this is known as a cross-class cramdown
- Where a plan is proposed within 12 weeks of the end of a new moratorium it cannot affect the rights of creditors in respect of debts arising during the moratorium or pre-moratorium debts that were excluded from the moratorium restrictions
- In this way, it is hoped companies can restructure financially and avoid insolvency
Termination / “Ipso Facto” clauses
- New legislation has been introduced to prevent suppliers of goods and services under a contract from terminating supply or amending terms to increase prices where a company enters an insolvency or restructuring process or implements a moratorium. This is similar to the existing rules for utility companies
- It only applies where a formal contract is in place (therefore not to ad hoc orders) and there is an exemption to 30th September 2020 for suppliers defined as small companies under the Companies Act (maximum of £10.2m turnover, £5.1m balance sheet or average of 50 employees)
- It also excludes financial services providers such as banks
- Supplies during the insolvency period must be paid for
- Suppliers can apply to Court if they feel it causes them undue hardship
As noted previously, a number of temporary measures have been brought in as a result of the COVID-19 pandemic.
Suspension of wrongful trading liability
- As has been widely reported, effective from 1st March to 30th September 2020, the wrongful trading rules have been suspended. The threat of personal liability contained within this previous legislation acted as a deterrent to directors from continuing to trade where they had no reasonable prospect of avoiding insolvency. The removal of this threat now allows them to do their best to save a company in these unprecedented times
- It should be noted that, although the wrongful trading provisions have been temporarily removed, other similar Insolvency Act provisions covering fraudulent trading, transactions at an undervalue and preferences remain. Furthermore it does not relieve directors of a general fiduciary duty to act in the best interests of creditors, so care must still be taken. The best guidance is always to document key decisions and take independent professional advice
Statutory demands and Winding Up Petitions
- The new law is intended to temporarily prevent aggressive creditors from using the threat of legal action to enforce payment of a debt at a time of mass financial uncertainty
- It voids statutory demands made between 1st March and 30th September 2020
- It also restricts the issue of Winding Up Petitions from 27th April to 30th September 2020
- It should be noted that this generally only relates to situations where a non-payment is due to COVID-19 and there have been a number of legal cases recently which found in favour of the creditor because the Court felt COVID-19 was being wrongly used as an excuse not to pay a debt that had been outstanding for many months
Companies House formalities
A number of other changes have been introduced in relation to compliance with Companies House regulations:
- Those companies that are required to hold an AGM or General Meeting are now allowed to do so by “other means”. This has been applied retrospectively from 26th March therefore any meetings held since then which, in order to observe the social distancing guidance, did not technically comply with the rules, would not be in breach of the company’s constitution
- Shareholders’ rights to vote are unaffected but they may not be able to vote in person
- Extension of certain filing deadlines as the government recognise that the current COVID-19 challenges may make it difficult for companies to file statutory documents such as accounts on time
If you feel any of our team of specialists can help then don’t hesitate to get in touch with your local Lifecycle contact