Corporate Insolvency and Governance Act 2020 – part 2

On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (the “Act”) received the Royal Assent in response to the COVID-19 crisis to help companies struggling due to the pandemic. This major reform of the UK’s insolvency procedures has been in the pipeline since 2018, but the draft bill was fast-tracked through parliament as a result of the current situation. The Act contains a number of temporary measures which benefit a much wider range of organisations by relaxing governance provisions for many organisations that are grappling with legal requirements relating to members’ meetings in the midst of social distancing practices and a number of permanent provisions that could be a great help to organisations which are facing serious financial hardship in the midst of this crisis. In our previous blog we covered the former. Here we outline the changes to the Insolvency legislation.

Changes to Insolvency legislation

The Act introduces a series of temporary and permanent amendments to the UK insolvency legal framework to allow companies in financial hardship to continue trading and provide some breathing space to explore different options.

The Act creates new insolvency provisions split into two categories: temporary and permanent.

A. Temporary provisions:
These temporary provisions were created and intended to last for the duration of the novel COVID-19 emergency.

1) Prohibition on presentation of winding up petitions:
The Act prevents creditors from presenting a winding up petition on the basis of an unsatisfied statutory demand served between 27 April 2020 and 30 September 2020 unless the creditor has reasonable grounds for believing that
(i) coronavirus has not had a financial effect on the company, or
(ii) (ii) the company would have been unable to pay its debts even if coronavirus had not had a financial effect on it.

2) Suspension of wrongful trading
The Act temporarily suspends wrongful trading provisions for a period of seven months with retrospective effect from 1 March 2020 to 30 September 2020.

The Act will therefore temporarily remove the threat of personal liability for wrongful trading from company directors while they make their best efforts to continue to trade. However, it is important to note that other insolvency law requirements – such as directors’ duties to give paramount consideration to the interests of creditors when a company is insolvent or close to insolvency – will continue to impact how directors are able to trade during this period.

The above two provisions are set by Parliament to expire on 30 September 2020. However the government may elect to extent them for at least six further months by passing secondary legislation.

B. Permanent provisions:
As mentioned earlier, the legislation has been in the pipeline since 2018 and therefore most of the provisions aimed to be introduced in order to help companies rescue operations.

1) Moratorium
Companies can pursue a rescue plan (such as a company voluntary arrangement (“CVA”)) without creditors being able to take legal action for a period of 20 business days (extendable to 40 business days, and beyond that with creditor or court approval).

This moratorium will be available to both solvent and insolvent companies (who have not been in an insolvency-related process in the previous 12 months), and will be overseen by a third party “monitor”, who must be a licensed insolvency practitioner. The monitor will have the power to bring the moratorium to an end if it becomes apparent that the company is unlikely to be rescued as a result of it.

2) New restructuring procedure

A new restructuring plan similar to existing schemes of arrangement under the Companies Act 2006 is to be introduced. The new plan is modelled on the scheme of arrangement and requires 75% in value of creditors to approve. However, the Court can bind certain dissenting creditors.

3) Termination clauses in supplier contracts (also known as “Ipso facto”)

Where supply contracts provide for termination of the contract on insolvency, the Act provides that such termination clauses will be automatically suspended, preventing suppliers from stopping or threatening to stop supplying the company when the company enters into insolvency or restructuring (as long as they are complying with their other obligations under the contract). Furthermore, suppliers will not be able to rely on certain contractual terms such as increasing prices upon a company’s insolvency.

To prevent undue hardship for small suppliers during the pandemic – as a consequence of this new provision – there will be a temporary exemption for small suppliers from 26 June to 30 September 2020 (as may be extended).

These provisions of the Act will also not apply to certain types of contracts, most notably loan agreements and other financial services.

Ioannis Efthyvoulou      iefthyvoulou@redfernlegal.com

Please note that this information is only for information purposes. And does not constitute legal advice. As this area of law is complex area of law, we would suggest that you seek legal advice for your specific matter. Redfern Legal will be happy to assist you.