Corporate Insolvency and Governance Bill supports covid hit businesses

Insights - 27/05/2020

Last week the UK government published the Corporate Insolvency and Governance Bill (CI&GB). These changes are aimed at helping businesses struggling in the wake of the coronavirus pandemic to survive rather than go bust, therefore helping protect jobs and supporting the UKs economic recovery. This blog looks at the key corporate insolvency provisions.

Mitigation of wrongful trading liability

The most significant change brought in by the Corporate Insolvency and Governance Bill is the mitigation of directors’ liability for wrongful trading (s214 Insolvency Act 1986) retrospectively, from 1 March to 30 June 2020 (or until one month from the coming into force of the Bill, if later). The objective is to allow company directors protection so that they can continue to trade their businesses and ride out the pandemic, preventing the insolvency of businesses that would otherwise be viable. Ordinarily, s214 liability would leave a director liable to pay money personally to the company for the benefit of creditors if a liquidator can satisfy the court that he continued to trade to the company’s detriment when he knew or ought to have concluded there was no real prospect of avoiding insolvency.

The Corporate Insolvency and Governance Bill requires the courts to disregard losses suffered by a company due to the pandemic, which means that directors may not escape liability for wrongful trading if their business was insolvent for reasons unconnected to the covid-19 restrictions.

Directors should be also be aware that the Corporate Insolvency and Governance Bill does not suspend liability for misfeasance, or breach of duty under s212 Insolvency Act 1986.

As a prudent director, if your business is insolvent, you should make sure you take advice from your professional advisers and document your reasons for continuing to trade.

Restrictions on the use of winding up petitions and statutory demands

The Corporate Insolvency and Governance Bill applies to all creditors, not just to landlords of commercial tenants, as had been initially suggested by the Business Secretary in his statement on 23 April 2020, as part of his package of measures to “protect the high street”.

The provisions apply even if the court has already made a winding up order in respect of a petition presented between 27 April and 30 June 2020 (or plus one month, as above).

After 27 April 2020, no winding-up petitions can be issued at Court where it follows a statutory demand served between 1 March and the later of 30 June or one month after the Bill comes into effect.  Importantly, a statutory demand served in this period can never be used as the grounds of the petition, even if the creditor waits until after 30 June to present the petition. This restriction does not require the creditor to enquire whether the company is covid-19 insolvent or is insolvent from some other cause.

Separately, during this period, a creditor may not issue a winding up petition, whether on the basis of a statutory demand or otherwise (an unsatisfied judgment, for example) unless the creditor has reasonable grounds to believe that the company is not covid-19 insolvent – in other words, some other reason than the pandemic has caused the insolvency.

Moratorium for debtor companies

Where a company is unable or likely to become unable to pay its debts, a moratorium will be available if the company can show that that this breathing-space would result in the company being rescued as a going concern. This is an out-of-court process, monitored by an insolvency practitioner, and begun by filing the application electronically at court.

Not all companies are eligible (financial services firms are excluded, for example) and the company must not have been in an insolvency process in the preceding 12 months – although if a winding up petition is “live”, the moratorium can be invoked by the court. The moratorium will last an initial 20 business day period but can be extended with creditor consent for a further 20 business days and with creditor/court consent for a year or more, subject to certain conditions being met.

The moratorium must be proposed by the company’s directors and is commenced by an out-of-court filing or by order of the court.

The practical effect of the moratorium will mean landlords cannot forfeit, security cannot be enforced and legal processes cannot start or continue without permission from the court. The moratorium will be closely monitored. During the moratorium, the directors must warn the provider of any new credit in excess of £500 that a moratorium is in place. There are restrictions on the types of contract that the company can enter into during a moratorium and restrictions on the payment of certain pre-moratorium debts.

A new restructuring plan – Part 26A plans

The new Part 26A restructuring will allow solvent and insolvent companies to propose a plan (a form of compromise) with its creditors that will bind both secured creditors and unsecured creditors, although it will be for the court to give final approval of the plan.

The principal difference between this new scheme and the current restructuring schemes is that the court can still sanction a Part 26A scheme if the creditors have voted against it.

Termination clauses in supply agreements

Many commercial contracts contain a default or termination clause that is triggered by insolvency. The Bill introduces a new provision that will prevent a supplier from refusing to supplying goods or services to a company just because that company has gone into insolvency and the relevant termination clause, which would ordinarily be relied on in these circumstances, is effectively rendered invalid. Further, the supplier cannot demand the payment of pre-insolvency invoices as a condition of continued supply. There are saving provisions - the supplier can still rely on an insolvency-termination clause if the administrator or liquidator agrees; if the company is in a CVA, Part 26A scheme or moratorium and it agrees to termination; or if the court gives permission because the continuation of the contract would cause the supplier hardship.

If you would like advice or assistance on any of the issues raised in this blog please contact Catherine Fisher, Head of Dispute Resolution. 

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.