The Corporate Insolvency and Governance Act (the Act) has obtained Royal Assent, with the majority of its provisions coming into force today.
Assisted by the Government’s sense of urgency, Parliament fast-tracked the Act to bring it into law as soon as possible. The Act addresses various issues arising for businesses from the COVID-19 pandemic, in particular the potential wave of business insolvencies that might arise as a result of the disruption caused the crisis (which we have already begun to see), as well as to provide updates to the UK insolvency regime generally.
We set out below a summary of the key measures introduced by the Act which UK companies need to be aware of if they are facing financial difficulties or the threat of insolvency.
Breathing space for UK companies – a free-standing moratorium
The Act introduces a free-standing moratorium with the primary aim of facilitating a rescue of a company in financial distress. Unlike existing moratorium procedures, the measure is streamlined and will not necessarily lead to a formal insolvency procedure – its central purpose is to promote the recovery of the company first without further action being needed.
Eligible companies can take sanctuary in an initial protection period of 20 business days. This can be extended to 40 business days by the directors and further extended thereafter by creditor agreement or the court. A licenced insolvency practitioner will be required to monitor the company’s progress during any moratorium period.
During the moratorium, the company is protected from action by creditors. This means, among other things, that security holders are prevented from exercising certain forms of security over company property, landlords cannot exercise their rights of forfeiture over premises let to the company, certain goods cannot be repossessed and, crucially, third parties are prevented from instituting certain types of legal proceedings against the company.
The moratorium also provides the company with breathing space by way of a payment holiday to give the company a temporary respite in respect of the payment on certain of debts. This payment holiday mainly covers trading debts and looks to alleviate some of the immediate financial pressures on the company so that the directors can focus on the recovery of the company.
Suspension of wrongful trading – directors can trade without risk of personal liability in respect of losses over a limited period
As we outlined in a previous update, the Act introduces a temporary measure to support and protect company directors, allowing them to continue to trade where they knew the company had no future and would end up in an insolvency process. This means they can continue trading without the threat of incurring personal liability to contribute to the company’s assets.
The measure intends to give viable companies a better chance of surviving the current crisis, given the uncertainty which directors are facing when it comes to knowing when the company in question may be able to trade and have money coming in the door.
The period of the suspension has retrospective effect, commencing from 1 March 2020 and ending on 30 September 2020 (unless extended for a further six months). The upshot of these provisions is that a court will not take into account losses incurred during this period when deciding whether or not to require a director to contribute to the company’s assets. And, as the presumption against a director’s liability for wrongful trading cannot be rebutted under the Act, any actions against directors in respect of this period will need to be brought on other grounds (for example, fraudulent trading or a breach of other director duties).
A new restructuring plan to bind dissenting creditors
Following the lead from US insolvency law, the Act introduces a new form of restructuring tool. Although similar to the existing scheme of arrangement procedure under English law, the new plan will have a key difference – companies have the power to bind classes of creditors to the proposal (with the sanction of the court), even where certain classes have not met the requisite level of votes in favour of the plan.
The effect of this power – known as a “cross-class cram down” – is that companies will be given unprecedented flexibility to proceed with a restructuring, even in circumstances where they cannot obtain the consent of all creditor classes.
Unpaid statutory demands – not to be used as a weapon for winding-up
Companies are often sent statutory demands requiring payment of an unpaid debt and the failure to pay any statutory demand can be relied upon by creditors to trigger an insolvency process.
In response to pressure being brought to bear on commercial tenants to pay outstanding rents, the Act prevents a winding-up petition being presented on the basis that a company has not settled a statutory demand.
The measure will mean that the expiry of an unpaid statutory demand made between 1 March and 30 September 2020 cannot now be used as the basis of a winding-up petition.
Additionally, during this period, the court will refuse a winding-up petition brought by a creditor on the grounds that a company is unable to pay its debts if the company can show that the reason for this was due to the financial effects of COVID-19. This is intended to be a low threshold and has already been tested in the courts – a company merely needs to demonstrate a financial effect, not that COVID-19 was the cause of the company’s insolvency.
Suppliers prevented from terminating contracts
In an effort to maximise the chances of recovery for any business in financial distress, the Act prevents a wide range of suppliers from terminating agreements with a company on the basis that the company has entered or proposes to enter into a formal restructuring or insolvency procedure.
This measure will, in effect, render certain termination clauses commonly found in supply of goods or services agreement invalid under the Act and may lock-in the supplier for the duration of the insolvency process (save for where the company or the court agrees to the contrary).
As a result, it is now more important than ever to ensure that other non-insolvency grounds for termination (such as enforcement of security, suspension of business etc) are appropriately included in supply agreements to give broad termination rights. And, where a party has a right to terminate, it will need to act quickly and assess whether or not to rely on it and terminate the contract, as that right to terminate will be lost once the counterparty enters into the insolvency process.
Relaxation of certain filing and meeting rules
In light of the emergency measures implemented by the UK Government as a response to COVID-19, which require businesses to close and which restrict the movement of individuals, the Act relaxes certain rules around the meetings of a company (such as an AGM). The duration of these measures will apply from 26 March to 30 September 2020.
The Act also empowers the Government to make further regulations to extend certain filing deadlines in light of COVID-19, such as the filing of accounts, confirmation statements and registration of charges, so long as the Government is satisfied that the need for the changes is urgent. The relaxation of these requirements will negate the risk of directors incurring financial penalties or, in some cases, criminal sanctions which would otherwise apply.
This information is part of a series of Harbottle & Lewis Business Law Updates, focusing on legal and business operational issues arising in the current COVID-19 crisis.
If you would like further information on the measures outlined above, please contact firstname.lastname@example.org