An overview of the Corporate Insolvency and Governance Bill 2020
Farhana Young, 27th May, 2020
Following the UK Government announcement in March that new insolvency and company measures would be expedited as a reaction to COVID-19, the Corporate Insolvency and Governance Bill has now been published and laid before parliament.
The aim of the bill is to protect jobs, support the survival of businesses and the UK economy, both temporarily to mitigate the impact of COVID-19 and permanently, to implement those reforms to the UK’s restructuring and insolvency regime that have been in development for some time.
As the bill is only in its first reading at parliament it could be changed before it is enacted, however given the amount of prior consultation on the bill it appears to be a strong indicator of what the substantive changes are likely to be. An overview of the key permanent and temporary measures included in the bill are summarised below:
(1) Permanent measures
The bill introduces a new moratorium to give companies breathing space from their creditors whilst they seek to be rescued. Companies that are insolvent (or likely to become insolvent) will be able to obtain a 20 business day moratorium period in which creditors cannot take enforcement or other legal action against the company whilst it attempts to restructure or implement an insolvency process. During the moratorium the directors will remain in control of day to day running of the company, though it does require the appointment of an Insolvency Practitioner as ‘monitor’, to oversee the moratorium and safeguard creditors in the way of approving; any new security over the company’s assets and any sale of the company’s assets outside the normal course of business. The initial 20 days business days can be extended for a further 20 days by the directors and up to a maximum of one year with the consent of creditors, or for a longer period with the consent of the Court.
The bill introduces a new restructuring plan which can be used by companies with financial difficulties to bind creditors, even where they are solvent. This is in addition to the currently available mechanisms which allow companies to reach a compromise with creditors e.g. via a scheme of arrangement or company voluntary arrangement. The new restructuring plan will provide companies with the capability to propose an arrangement or compromise with creditors / members of the company to enable a restructure in a largely similar way to a scheme of arrangement (whereby it can affect the rights of secured creditors without their consent, if it obtains a 75% approval from each class of creditors and court approval). However, unlike a scheme of arrangement, where one or more classes of creditor do not approve the plan, it can in any event, be approved by the court if they find the plan is just and equitable in respect of the company and creditors and members alike.
Supplier termination clauses
The bill introduces a prohibition on termination clauses that are triggered on insolvency, preventing suppliers from ceasing their supply or asking for additional payments whilst a company is in the midst of a rescue process. Suppliers will often threaten or refuse to stop supplying a company that has instigated an insolvency / restructuring process and the supply contract often provides the right for the supplier to do this. The new measure will disapply such contractual rights of a supplier to stop supplying a company, terminate the contract or do “any other thing” e.g. insisting on amending the contract with adverse terms such as an increase in payments, where it has entered an insolvency / restructuring procedure though continues to pay the supplier. It will apply to all suppliers (bar those involved in the provision of financial services and those already protected by existing legislation) in order to aid the company’s rescue plan. There are safeguards for suppliers to ensure that goods and / or services are paid for and suppliers can be relieved of this obligation if it causes them hardship. Further there will be temporary relief from this measure for small company suppliers during the pandemic (until the later of 30 June 2020 or month from the bill’s enactment which could be extended or reduced).
Extension of filings
Companies are currently required to file prescribed documents at Companies House every year pursuant to the Companies Act 2006. Failing to meet these deadlines automatically results in a financial penalty and may result in criminal sanctions for directors or the company being altogether struck off. The bill will allow the Secretary of State to extend the deadlines as follows: (1) 42 days where the period is currently 21 days or less; and (2) 12 months where the period is 3, 6 or 9 months.
(2) Temporary measures
Statutory demands and winding-up petitions
Whilst it was presumed by many that these news measures would apply only to landlord creditors, the measures actually prohibit all creditors from filing statutory demands and winding up petitions on a temporary basis. The new measure will void statutory demands made between 1 March 2020 and 30 June 2020 and restrict winding up petitions from 27 April 2020 to 30 June 2020. Similarly, no petition for the winding up of a company can be presented on or after 27 April 2020 on the ground that the company failed to satisfy a statutory demand which was served during the period 1 March 2020 and 30 June 2020. However, a creditor will be able to petition on an existing statutory demand (served prior to the above period) where they have reasonable grounds to believe that:
- Coronavirus has not had a financial effect (if the debtor’s financial position worsens as a result of, or for reasons relating to coronavirus); or
- The debtor would have unable to pay its debts even if coronavirus had no financial effect on them.
Suspension of wrongful trading
The bill will temporarily remove the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency for any period of trading between 1 March 2020 to 30 June 2020. The measure will temporarily suspend the wrongful trading provisions between this period and allow the Court to assume that the director is not responsible for the worsening of the company’s financial position or its creditors during this period, in connection with a wrongful trading action against him. It should be noted that this temporary measure does not affect directors’ duties, including the duty to take the interests of creditors into account where there is a likelihood that the company will become insolvent.
Annual General Meetings and general meetings
The bill will temporarily allow companies which are under a legal duty to hold an Annual General Meeting or General Meeting to hold a meeting in a way which adheres with social distancing even if their constitution does not allow it from 26 March 2020. The measures will allow those meetings to be deemed to be in accordance with the law and will not there cause the directors to be liable for measures that need shareholder endorsement. However, the measures will not prevent shareholders from exercising their right to vote on matters before the meeting though they could be prevented from voting in person. Further, where a company was forced to postpone an Annual General Meeting which was due to be held after 26 March they will be given a limited period of time after the bill is enacted to hold this.
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