Corporate Insolvency and Governance Act 2020 – extension of restrictions
29 September 2020
Further protection for some businesses but further frustration for others.
We have previously discussed that the Corporate Insolvency and Governance Act 2020 (the Act) has introduced a number of measures to protect and support businesses through the COVID 19 pandemic. These measures fall in to two categories: those that are permanent and those that are temporary insolvency measures. The permanent measures include the introduction of a new restructuring process, a ban on insolvency termination clauses and a freestanding moratorium procedure. The temporary measures, briefly outlined below, were due to end on the expiry of the ‘relevant period’, specified in the Act as the 30 September 2020.
However, with effect from the 29 September 2020, the Secretary of State has extended the relevant period for some of the temporary measures, following calls that the financial effect of the pandemic on most businesses has not improved and many are still struggling.
To recap, the Act introduced the following temporary measures. Firstly, a suspension on the service of statutory demands as the basis of a winding-up petition during the relevant period. Similarly, the Act prevents creditors from presenting a petition against a debtor company unless the creditor was able to prove that the corona virus did not have a financial effect on the debtor company. Thirdly, for company directors trying to trade through this period of economic uncertainty, personal liability for wrongful trading is suspended. Alongside this, an exemption for small suppliers on the ban on contractual clauses entitling a party to terminate when another party enters formal insolvency or restructuring regimes (so called ‘ipso facto’ clauses). Finally, the Act also provides an extension on the deadlines for filings at Companies House and greater flexibility for company meetings (the ‘corporate governance measures’). For further detail on these measures, please follow the link to the full article provided above.
The Secretary of State has used the power conferred under the Act to extend the relevant period for some of these temporary measures by up to six months:
- the exemption for small suppliers from the ban on ipso facto clauses – 30 March 2021
- the temporary provisions in relation to moratoriums – 30 March 2021
- the prohibition on petitions based on statutory demands – 31 December 2020
- the prevention on creditors presenting a petition against a debtor company, where the company’s inability to pay is due to coronavirus – 31 December 2020
- the flexibility on companies to hold meetings – 30 December 2020. Note however this has only been extended for ‘qualifying companies’.
Notably, the Secretary of State has not extended the relevant period for personal liability for wrongful trading, nor the extension on the deadline for filings at Companies House.
The end of the relevant period on 30 September 2020 would have been a significant turning point for businesses navigating through the pandemic. Whilst the extension will be seen by many as a welcome further period of breathing space, companies will still need to monitor their debt levels and payments carefully.
Following the end of the new relevant periods, it is likely that there will be an increase in the number of actions brought against companies that are linked to the temporary measures, particularly based on statutory demands to commence winding up proceedings. As such the Government’s decision could be seen as simply delaying the inevitable wave of insolvency litigation that will unavoidably follow, rather than offering any practical solutions. It remains to be seen whether the Government will make further extensions into next year, but any additional extensions are subject to a reasonableness test that considers amongst other matters the ongoing interference with the rights of creditors. Indeed, the Government expressly recognises that these latest extensions are a significant intrusion into the normal workings of insolvency law.
The Act also makes separate provision for the Secretary of State to amend or modify the effect of the Act to assist in reducing the number of businesses entering into formal insolvency procedures. Whilst there are some restrictions on this provision, the drafting is intentionally wide so that the Secretary of State can act quickly and pragmatically should the pandemic continue to have an ongoing adverse effect on businesses. This power is time limited however; the Secretary of State cannot make changes under this provision after 30 April 2021.
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William Arran
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Laurence Weeks
Services
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at September 2020.