Changes to Corporate Insolvency and Governance Laws as a Result of COVID – 19

Please note that this article should be read in conjunction with ACLF’s article on ‘Changes to Corporate Insolvency and Governance laws as a result of COVID – 19’

On 26 June 2020, the UK was provided with changes, of both a temporary and permanent nature, to the law of insolvency. These changes were introduced by the Corporate Insolvency and Governance Act 2020 (the Act). The Act’s primary aim is to help businesses survive the financial uncertainty brought about by the Coronavirus pandemic.

Temporary Measures

The Act introduced 2 key temporary measures that are discussed below. The provisions were due to expire on 30 September 2020. Only 1, the provision surrounding winding-up petitions, has been extended until 31 December 2020. The other provision surrounding wrongful trading has not been extended due to low reliance on it, however, it is still useful to discuss.

Winding up petitions

Under the Act, petitions to wind up a company will be void if one of the following apply

  1. The petition is made on a statutory demand made against the company between 1 March - 31 December 2020; OR
  2. The petition has been presented to court between 27 April – 31 December 2020. Unless the petitioner can prove that the pandemic has not had a financial effect on the company OR the facts of the petition would have arisen even if the pandemic had not had a financial effect on the company.

Wrongful Trading

The liability for wrongful trading was relaxed. There was no overall defence given, however, the courts were allowed to assume that a director was not responsible for worsening the financial position of their company (or creditors) between 1 March – 30 September 2020. Directors are, therefore, usually not meant to be liable to contribute to any losses incurred during this period.

Permanent Measures

Restructuring

A new insolvency process brought about by the Act has been continued indefinitely. The process is comparable to a scheme of arrangement as it requires the sanction of the courts. It allows for the restructuring of debts and gives additional support for financial rescue. The plan will need 75% approval from the affected creditors (by class).

This process will even allow classes of disapproving creditors to be bound by the decision if 2 conditions have been met:

  1. The dissenting class of creditors will be no worse off under this plan than a ‘relevant alternative; AND
  2. A class of creditors representing 75% in value, who will receive payment under the plan (or who have a genuine interest in a relevant alternative), have voted in the plan's favour.

Moratorium

The Act will grant businesses that are struggling a formal period in which they may pursue a rescue plan. This ‘Moratorium’ will ensure no legal action can be taken against the business without permission from the court. The Moratorium will last for 20 days and can be extended for another 20.

During this period, the company will be granted a holiday from all debts. It also means the company is unable to make payments against their debts during this period. The Moratorium puts, amongst other things, the following on hold:

  • Winding up petitions;
  • Appointment of administrators;
  • High court enforcement officers and bailiffs; and
  • Landlord actions such as the forfeiture of a lease or commercial rent arrears recovery (CRAR).

This process is similar to the administration processes, with the main difference being that the current board of directors retains control of the company. In order to be eligible for this, the following criteria must apply:

  • businesses must be a limited company or an LLP registered in the UK (although financial institutions cannot apply)
  • the company must be insolvent, likely to become insolvent or unable to pay its debts
  • a licenced insolvency practitioner must agree to be a monitor
  • this monitor must believe the company can be rescued as a going concern

The monitor will need to notify the creditors and a notice confirming the company is subject to a moratorium should be displayed in physical shops and on the website of the company.

  • The Moratorium will be brought to a successful end if:
  • The creditors approve a Company VoluntaryArrangement
  • An informal payment plan is agreed with creditors
  • The directors raise personal funds to pay creditors
  • Investment (or business loan) is obtained
  • HMRC agree a Time to Pay arrangement

If the above does not apply then the company is likely to enter liquidation or administration.

The moratorium is a welcome permanent feature due to its powerful and versatile functioning.

Termination Clauses for the Suppliers of Goods and Services

The Act prevents the suppliers of a company in an insolvency procedure (including the above Moratorium) from relying on the contractual terms to stop/terminate or vary their agreements. However, when this is provided the suppliers are still being paid.

Terms that allow suppliers of a company to terminate the agreement, in the event of the company entering into an insolvency process, will be invalid. Even if the supplier was entitled to terminate their contract before the insolvency process begins, as soon as it does begin, the Act prohibits these terms from being used.