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Significant reforms to UK insolvency Law: Corporate Governance and Insolvency Act 2020
On 25 June 2020, the long awaited Corporate Insolvency and Governance Act 2020 (the Act) received royal assent and came into force on 26 June 2020.
In the few months prior to its inception, the Act has been adapted to support businesses suffering from hardship during the COVID-19 pandemic. It is intended to offer temporary and longer term protection to businesses and represents a shift to a more debtor friendly insolvency regime.
- A temporary suspension of director’s liability for wrongful trading
Section 214 of the Insolvency Act 1986 permits the Court to order that a director of a company can be found liable, for what is generally known as “wrongful trading”. Wrongful trading can occur if a director becomes aware or ought to have become aware that there was no reasonable prospect of the company avoiding insolvent liquidation or administration and despite this, they failed to take every step to minimise potential loss to the company’s creditors.
The effect of the new Act is such that the Court must assume that a director is not responsible for any worsening of the company’s financial position to the detriment of the company’s creditors, over the period from 1 March 2020 to 30 September 2020. Consequently, if a director is later found liable for wrongful trading and the Court is asked to determine the extent of that liability, any losses suffered by the company during this period will not be recoverable from the director. It should be noted that the protection that the Act intends to afford does not, however, extend to the directors of banks or insurance companies.
It is apparent that this recent amendment to the Act is intended to help directors trade a company through the pandemic, by removing the threat of personal liability if they do not take every step to minimise the potential loss of the creditors. The reality is that this provision is unlikely to have any real impact on the conduct of directors, who will still be subject to their various statutory and common law duties and should still be seeking and following professional insolvency advice, in circumstances where they consider that there is no reasonable prospect of the company avoiding insolvent liquidation or administration.
- A temporary prohibition on the presentation of winding up petitions
Temporary restrictions are being introduced in the Act to protect companies that are unable to pay their debts, as a result of the impact of COVID-19. The restrictions apply to statutory demands and winding-up petitions against companies but do not apply to statutory demands served on individuals or to bankruptcy petitions.
The restrictions, which will take retrospective effect, provide that a winding up petition cannot be presented to the Court if it is in reliance on an unpaid Statutory Demand served between 1 March 2020 and 30 September 2020). Further, a winding up petition cannot be presented to the Court from 27 April 2020 to 30 September 2020, unless there are reasonable grounds for believing that: a) COVID-19 has not had a financial effect on the company; and/or b) the company would not have been able to pay the debt(s) regardless of the financial impact of the pandemic.
Further guidance from the High Court on the interpretation of the Act is already coming to light. In a very recent case it was held that the onus was on the debtor company to prove that COVID-19 has had a financial effect on the company before the presentation of the petition. It has also been held that the debtor company has to show that it has suffered a financial effect due to COVID-19 but this need not be the cause of the company’s insolvency. It is hard to imagine that most businesses will not have been financially impacted by the pandemic in some way. Consequently, the Act is likely to have a significant impact on credit control, debt collection and both present and future insolvency proceedings, as parties and the Courts wrestle with what constitutes sufficient “financial impact”.
- The permitting of all company meetings to be held electronically
The Act introduces a sensible and practical measure of allowing company meetings to be held via an electronic means, even if it is not prescribed for in a company’s constitution.
Directors should take confidence from the fact that a meeting held virtually by Zoom or another platform, will not be deemed to be improperly constituted or unlawful due to the attendees having not met in person.
- An extension of time for the filing of certain documents and for AGMs
The Act provides a temporary extension of time for the filing of accounts, confirmation statements and the registration of charges. It also permits the adjournment or delay in holding requisite AGMs.
This is again a temporary provision introduced to allow for the effects of COVID-19 and the impact on the ability of companies to practice in the ordinary way. It appears intended to prevent unfair criticism of directors or company management for failing to comply with company law.
- A new temporary moratorium
The Act introduces a new 20 business day moratorium for businesses struggling to maintain solvency. It is intended to provide a company with temporary relief from creditor pressure, in order to derive a plan to rescue the business. A company can apply for a moratorium by filing certain prescribed documents with the Court. The company will require a statement from a “monitor” that the moratorium is likely to result in the company’s rescue as a going concern.
The moratorium is intended to last for an initial 20 business days but it can be extended for a further 15 business days by filing further statements with the Court. After this initial period, it can be extended further either with the consent of the creditors or the Court. The moratorium has the effect similar to that of an administration, as it freezes the enforcement and insolvency processes but unlike in an administration, it will not prevent Employment Tribunal proceedings continuing.
The moratorium will also have the effect of restricting the company’s ability to obtain credit and to make certain disposals, without the consent of the monitor or the Court.
This new moratorium is likely to provide a useful tool for profitable SMEs that are struggling with cash flow due to the pandemic and the involvement of the monitor and Court should prevent its abuse.
- A Court approved restructuring scheme
The new restructuring plan has long been anticipated and is intended to enable companies and their creditors to enter into a scheme of arrangement as an alternative to a Creditors Voluntary Arrangement.
The main feature of the plan is its ability to allow companies to bind all creditors, without their consent, subject to certain requirements having been established. This could potentially include secured and other creditors opposed to the scheme by imposing a “cross-class cram down” on their debts, providing that: 1) 75% in value of the creditors agree; 2) the Court approves the scheme; and 3) none of the members of the class of creditors opposed to the scheme would be worse off than they would be under the most likely alternative, which in many cases would be administration.
This new restructuring plan is likely to be of particular concern to secured creditors, who risk losing a degree of control over the process and will want to be confident that the Court has properly considered that they will not be worse off, than the most likely alternative.
- Nullifying termination clauses in supply contracts
The Act proposes to nullify contractual rights in supply contracts, to prevent suppliers from relying on termination clauses in a contract, when a company enters into some form of insolvency procedure.
In order for this provision to be applicable, the supplier will still have to be paid but it prevents the supplier from insisting on revised terms such as payment in advance. Small entities, as defined in the Act, are exempt from this provision and other larger companies can apply to Court for exemption on the grounds of financial hardship. Suppliers should be aware of this new obligation and consider the possible implications for their business, should their customer enter into an insolvency procedure.
This note is intended to serve as a brief overview of some of the key points arising from the Act but there are various other measures, introduced by the Act, which are not covered in this note.
If you would like to understand more about the Act and how its measures may affect your business, please contact one of the Goodman Derrick team to discuss further.
This guide is for general information only and should not be relied upon as providing specific legal advice.