The Corporate Insolvency and Governance Bill in light of COVID-19

As we see a partial easing of lockdown and more businesses are able to return to some kind of normalcy, the long term effects of the COVID-19 pandemic are yet to be fully realised. What is clear is that many businesses of all sizes have struggled to cope with such unprecedented challenges and require support from the government to increase their chances of survival.

This support is in part provided by the Corporate Insolvency and Governance Bill (the Bill) which is likely to come into force in late June. Whilst an overhaul of insolvency legislation had been scheduled, the Bill was rushed through to provide both permanent and temporary legislation to those struggling as a result of COVID-19.

In this article we attempt to address some of the key provisions outlined in the Bill and what they will mean for businesses. As with other legislation created to support businesses and individuals during the pandemic, there are likely to be amendments made over time as the situation changes so it is always wise to contact your solicitor to receive the most up to date advice.

Temporary Measures

The temporary measures outlined in the Bill are due to run until 1 month after they come into force, although it is likely that the measures will be extended further, as has been the case with several other temporary schemes that the government has enacted to support the economy during this time. It should be noted that this is not guaranteed, and there is currently no clarity on how long any extension would last.

Wrongful Trading Liability

• Courts have been instructed to ignore directors’ liability for compensation arising from claims of wrongful trading between the period from 1 March 2020 until 1 month after the legislation comes into force. Removing the prospect of personal liability should assist in incentivising directors to continue to operate their business and protect their business for the future.
• With this provision directors still maintain the duty to act in the best interest of creditors, so must still act responsibly. For more detailed information please refer to our previous article on the financial impact of the Coronavirus

Winding-up  Petitions

• Creditors are restricted from issuing winding-up petitions, where they rely on a statutory demand served during the same period (1^st March until 1 month after the Bill is passed) Winding-up petitions may only be presented on the ground that a company is unable to pay its debts as they fall due (without first having served a statutory demand), unless the creditor reasonably believes that the Covid-19 restrictions had no financial impact on the debtor company or that the debt issues would have arisen in any event. One should therefore proceed with caution in pursuing any debts by presenting a winding-up petition, as it for the creditor to satisfy the court that the inability to pay the debt is not related to Covid-19.

Companies House regulations

• Due to the difficulties caused by lockdown in holding physical meeting for the period between 26 March 2020to 30 September 2020, companies that are required to hold an AGM are allowed to hold these by telephone or video conference and shareholders may vote remotely. Furthermoe filing deadlines have been extended for statutory documents such as accounts and confirmation statements.

Permanent Measures

Statutory Moratorium

• Companies who are unable, or likely to become unable, to pay their debts are now given additional protections in a new “debtor in possession” process. This provides companies and LLPs a 20 day period where their actions are overseen by a Licensed Insolvency Practitioner as a “Monitor” and no legal action can be taken against them while they create a turnaround plan. The moratorium can be obtained by simply filing forms with the court, unless a winding-up petition has been presented against the company, in which a court order is required.
• The period can be extended by up to a year with consent from creditors or through court action, although prior approval from a secured creditor is not required to enter the “debt in possession” period. The responsibility of the “monitor” is to ensure that the creditors interests are being protected.

New Restructuring Process

• Similar to a Scheme of Arrangement, the new restructuring procedure allows for companies, their creditors, or their members to propose their own restructuring plan. Unlike a Scheme of Arrangement, a Court can approve the plan even if creditors or members dissent or vote against it.
• To be approved, the Court must judge that any plan is fair and does not leave creditors any financially worse off than any other proposals.

Termination clauses

• Similar to the current rules that exist for utility companies, businesses that supply goods or services will have any clauses which terminate supply of goods or amend terms to increase prices if this is triggered by a company entering insolvency or restructuring processes. These measures only apply to formal contracts and do not apply to small businesses or financial services provider. They also do not prevent termination of the contract on other grounds.

Moving forward

As the situation continues to evolve, these measures will no doubt be amended further in order to further protect businesses in such a challenging time. If your business is struggling or affected by any if the legislation discussed in this article, please contact Spratt Endicott solicitors today.

Petra van Dijk is an Associate Solicitor in Spratt Endicott’s Dispute Resolution practice, specialising in contentious and non-contentious insolvency. Contact Petra on pvandijk@se-solicitors.co.uk.

*Disclaimer: While everything has been done to ensure the accuracy of the contents of this article, it is a general guide only. It is not comprehensive and does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.