Changes to insolvency and corporate governance law

This article was updated on 5 August 2020. The Corporate Insolvency and Governance Bill received royal assent on 25 June 2020. It came into force on 26 June 2020. It is now known as the Corporate Insolvency and Governance Act (the Act).

The Act largely mirrors the proposals set out in the bill as summarised in the article below. There are a few key differences to highlight which should be read in conjunction with the remainder of the article.

The moratorium and the restructuring process are in force for companies in financial distress to take advantage of as outlined below.

The relevant period (as explained below) in respect of statutory demands served on companies and winding-up petitions has been extended to 30 September 2020. Pursuant to the Act, statutory demands will be void if served on a company during the relevant period and no winding-up petition can be served on the company based on such statutory demand. Further, during this relevant period, a creditor may not present a winding-up petition unless it can satisfy the criteria outlined below.

The wrongful trading relevant period has also been extended to the 30 September 2020. The remainder of the provisions in respect of wrongful trading as previously set out in the Bill remain.

Termination clauses in supply contracts, the so called ‘Ipso Facto’ clauses are banned. There is temporary exemption for small company suppliers until 30 September 2020 but this date is subject to possible extension.

Finally the company meetings flexibility remains in the Act for those companies due to hold general meetings between 26 March and 30 September 2020. This period can be shortened or extended for up to three months (to 5 April 2021 at the latest).

A framework of changes to insolvency law was first proposed in 2018. Since the coronavirus struck, the Government recognises that many businesses that would otherwise be economically viable are experiencing significant and potential terminal trading difficulties due to the COVID-19 pandemic. 

We have discussed certain announcements to insolvency law previously, dealing with the relaxation of the law relating to wrongful trading.

The Corporate Insolvency and Governance Bill (the Bill) has been drafted to enact into law the proposals from 2018 as well as other new temporary measures designed to give businesses as much flexibility and breathing space as possible to maximise their chances of surviving these turbulent times.

Certain provisions in the Bill have retrospective effect, and the changes can be split between those that are permanent and those that are temporary.

Key aspects of the Bill are discussed below.

My company is in financial difficulties. How will this Bill help?

The Bill introduces several permanent reforms to restructuring law:

1. A new restructuring process
   This process is intended as another way for companies to restructure their liabilities via a compromise or arrangement with creditors or members. Importantly, the rights of secured creditors can be affected without their consent and the scheme can, in certain circumstances, be sanctioned by the court and forced upon creditors that oppose the scheme (known as cross-class cram down).
   
   In order to make use the restructuring plan, the company must be in or likely to be in financial difficulties that affect, or will or may affect, its ability to carry on business as a going concern.

2. A new free-standing moratorium procedure
   A company struggling financially can take advantage of this new procedure without beginning any other formal insolvency proceedings. The company will remain under the control of the directors, but a licenced insolvency practitioner would act as a ‘monitor’. It is intended to give companies breathing space in which to explore its rescue options, such as a CVA, sale or refinancing, use of the existing scheme of arrangement under the Companies Act, or use of the new restructuring process referred to above.

The moratorium will be available to a company that cannot pay its debts, or is likely to become unable to do so. It will be commenced by filing the relevant forms at court. These forms will include statements from the company and the proposed monitor regarding the financial position of the company and prospects of its rescue. The initial moratorium period will be 20 business days but can be extended for up to a year provided creditors agree. The moratorium will protect the company from creditor action against it, from both secured and unsecured creditors. To avoid abuse a company cannot use this if it has been in a moratorium in the previous 12 months and must continue to meet its trading liabilities during the moratorium as they fall due. It must also be brought to an end if the monitor believes the company is unlikely to be rescued.

Temporary measures include protection from aggressive creditor action, provided the company’s financial difficulties are directly related to the coronavirus pandemic, temporary suspension of the wrongful trading regime and relaxation of certain Companies House filing deadlines and requirements in respect of company meetings.

My invoices have not been paid. Can I still issue a winding up petition against the debtor?

Possibly; the facts of each matter will need careful review.

Once law, the Bill will temporarily prevent any statutory demands served on companies between 1 March 2020 and 30 June 2020 from being used as the basis of a winding-up petition on or after 27 April 2020.

The Bill will also temporarily prohibit creditors from presenting a petition against a debtor company from 27 April 2020 unless the creditor has reasonable grounds to believe the coronavirus has not had a financial effect on the debtor company, or the relevant ground would have arisen in any event even if the coronavirus had not had a financial effect on the debtor company.

If a petition has been presented between 27 April 2020 and the date the Bill becomes law and the grounds referred to immediately above are not met, the court can make an order restoring the debtor company to a position as if the petition had not been presented. The petitioner may be liable for the costs of this.

Moreover, the court will only make a winding up order on these grounds if it is satisfied the debtor company would be unable to pay its debts even if the coronavirus had not had a financial effect on the company. If a winding up order is made in this interim period (27 April and the date the Bill becomes law), it will be void if it does not meet this requirement.

I am a director of a company in financial difficulty due to COVID-19. I am concerned about personal liability if the company continues to trade but ultimately still fails and I have just made matters worse for creditors.

To lessen this concern, the Bill will temporarily suspend the wrongful trading regime during the ‘relevant period’, which is 1 March 2020 to 30 June 2020 (or one month after the Bill becomes law, whichever is later), so it is retrospective in effect. This period can be extended if the effects of the pandemic on businesses continues past the end of June.

The effect of this provision mean that directors of a struggling company who decide to continue to trade will not be personally responsible for any worsening of the financial position of a company in this period if the company subsequently enters liquidation or administration. Note that directors must still comply with all other duties, and other insolvency law provisions do still apply. Directors of certain businesses are excluded from this suspension, including those of most financial companies.

I am a supplier. Will this proposed law prevent me from terminating a contract triggered by the insolvency of the customer?

Yes. The Bill prohibits suppliers from invoking contractual termination clauses due to the other party entering a formal insolvency procedure or qualifying restructuring (this will include the new moratorium procedure and restructuring process referred to above). It also invalidates any other contractual provision that seeks to change the contract terms in these circumstances, such as increasing the price or demanding payment of outstanding invoices as a condition to continued supply. This prohibition is currently restricted to suppliers of specified essential services such as utilities and communication and internet providers, so this proposed measure has much wider application. These changes are permanent.

There is a temporary exemption for small suppliers to these prohibitions but only between when the Bill comes into force and 30 June 2020 or one month after it comes into force, whichever is later.

The office holder or director of the insolvent company will not be required to provide a personal guarantee to the supplier for the costs of the continued supply.

A supplier can still terminate a supply contract for reasons other than the onset of insolvency proceedings, if provided for in the contract. Contracts can also be terminated with the agreement of the office holder in insolvency proceedings, or with the company’s consent in other cases.

If consent is not forthcoming, a supplier will have the ability to apply to court for permission to terminate the contract if continued supply will cause it hardship.

How will this affect deadlines in respect of Companies House filings, and general meetings and annual general meetings due to be held this year?

The Bill provides for further regulations that will temporarily ease filing deadlines for filings such as annual accounts, confirmation statements and other forms and the registration of charges, by 42 days where the existing period is 21 days or fewer and 12 months where the existing period is 3, 6 or 9 months.

The Bill also introduces greater flexibility for company meetings. Provisions include the ability to hold meetings entirely by electronic means, and they do not have to be held in any particular place. Shareholders would lose their right to attend in person and participate in meetings, other than by voting.

Companies will also be allowed to postpone AGMs until 30 September 2020, if one is required in accordance with the law or the company’s constitution in the period referred to below.

These measures apply for a temporary period beginning on 26 March 2020 and ending on 30 September 2020. This period can be extended, but not past the end of the current financial year.