Corporate Insolvency and Governance Bill 2020
Key Contact: Natalie Jones
Author: Joe Smith
The Corporate Insolvency and Governance Bill 2020 (the Bill) aims to shake up current insolvency rules to offer a lifeline to companies that are on the edge of insolvency. The Bill was published on 20 May 2020, with the hope that it will allow companies a greater chance of survival in light of interruption caused by COVID-19. The Bill will bring in the following key changes: –
1. New Moratorium
Under a Moratorium, no legal action can be taken against the company without the leave of the court. The Bill will allow companies to obtain a free-standing Moratorium, with the hope of giving companies more time to assess their circumstances and consider potential rescue plans. Directors remain in control of the company, subject to a “monitor”. This is one of the more radical proposals of the Bill, as moratoriums are currently restricted to companies in the administration process and small companies entering into a Company Voluntary Arrangement (CVA).
All companies are eligible to utilise this moratorium, provided they are not already subject to insolvency procedures or have not been subject to insolvency procedures during the last 12 months. The moratorium will not apply to certain financial institutions, including banks, insurance companies and investment firms. The moratorium will last for an initial period of 20 business days, with the possibility to extend by a further 20 days (once 15 days of the initial period has expired). In order to apply for the proposed moratorium, the directors of the company would have to file the following documents with the court:
- A notice that the directors seek to obtain a moratorium;
- A statement from a qualified person that they consent to act as the monitor;
- A statement given by the proposed monitor that the company is eligible to receive a moratorium;
- A statement made by the directors that the company is or is unlikely to be able to pay its debts; and
- A statement from the monitor that the moratorium will likely result in the rescue of the company.
2. Suspension of wrongful trading
The Bill proposes suspending the potential for personal liability arising from wrongful trading of directors. This means that directors will not be liable for continuing to trade where there is a real prospect that the company may not survive and would likely enter insolvency proceedings in the future. Liquidators and administrators would be unable to bring claims against directors for any losses caused to the company or its creditors. This recognises the uncertainty and struggle faced by companies due to COVID-19 and aims to reduce the pressure on directors to wind down businesses that have a prospect of surviving. It is worth noting that this is only a temporary measure and the period in which this can be utilised runs from 1 March 2020 to 30 June 2020 (or one month after the Bill is implemented, whichever is later). It does not also give directors a free pass, and directors will need to ensure that they are continually assessing the company’s financial position
3. Prohibition of statutory demands and winding up petitions
The Bill seeks to prevent aggressive creditor debt collection strategies by placing restrictions on when winding up petitions and statutory demands may be presented. Statutory demands cannot be presented between the period of 1 March 2020 and 30 June 2020 (or one month after the Bill is implemented, whichever is later). Furthermore, winding up petitions cannot be presented by creditors unless they have reasonable grounds for believing that COVID-19 has not had a financial effect on the company or if the facts would have arisen anyway, regardless of the impact of COVID-19.
4. New Restructuring Plan
The Bill proposes a new restructuring plan to support companies through debt obligations and give them the adaptability to restructure the company. The Bill will give the court the power to sanction a restructuring plan that is capable of binding creditors, so long as this is fair and in the interests of the creditors. This is a useful alternative to CVAs and the Scheme of Arrangement already in operation. Court approval is required to sanction such a plan, in addition to the approval of 75% of the creditors or class of creditors.
5.Companies House Filings
The Bill will temporarily give companies more time to file accounts, confirmation statements and relevant notices (for example, a notice that a new director has been appointed). The Bill recognises that COVID-19 has made it difficult to obtain access to offices and to collate the necessary information, and this provides companies the much-needed flexibility.
6. Termination clauses in supply contracts
Supply contracts commonly allow a supplier to terminate the contract where the other party begins formal insolvency proceedings. Under the Bill, this right of a supplier to terminate a contract for reasons of insolvency would be disapplied. Therefore, suppliers would be required to continue to supply their goods under the contract, regardless that the other party may be insolvent or is beginning insolvency proceedings. These restrictions would not only apply to CVAs or administration proceedings, but also companies using the moratorium provisions. By allowing insolvent companies to continue to receive goods, their chance of survival may be increased.
For more information on any of the topics raised, please get in touch with our Corporate Team.