Corporate Insolvency and Governance Bill

The government’s Corporate Insolvency and Governance Bill has now been passed in the Commons and is set to go before the House of Lords next week. It is expected to obtain Royal Assent and become law in early July.

The Bill, which was announced in late March, contains rule changes to assist struggling businesses during the coronavirus pandemic.  Some rule changes are temporary and there is an entirely new form of restructuring procedure.

Broadly, the measures being introduced in the Bill are:

Moratorium

The Bill introduces a four-week moratorium (that can be extended under various circumstances), during which no legal action can be taken against the company or its assets without leave of the court, so that a rescue plan may be considered.  The moratorium will be monitored by an insolvency practitioner, but the company remains under the control of its directors.

Currently this protection is only available to companies which intend to appoint an Administrator, or which meet the criteria to be able to apply for a moratorium as part of a Company Voluntary Arrangement.

Arrangements and Reconstructions

This new procedure is similar to a Scheme of Arrangement and will allow struggling companies to propose a compromise to their creditors and members.

The procedure will be available to a company that has encountered, or is likely to encounter, financial difficulties that may affect its ability to carry on business as a going concern. It is intended to allow debt arrangements to be restructured and to support the injection of rescue finance into the business. It will also provide for dissenting classes of creditors to be bound by the plan if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure.

Statutory demands and Winding-up petitions

The Bill introduces temporary provisions to render any statutory demand served between 01 March and 30 June 2020 void and to prevent any debt-based winding-up petition being issued (whether based upon a statutory demand or not). The exceptions to this are if the creditor can show reasonable grounds for believing either that corona-virus has not had a financial effect on the company, or the facts on which the petition is based would have occurred anyway.

Where petitions have been presented before these provisions come into force, the court will have jurisdiction to make any order it thinks appropriate to restore the position to what it would have been if the petition had not been presented.

Wrongful Trading

Section 214 Insolvency Act 1986 provides that a director can be ordered to contribute to the company’s assets if they fail to take every step which a reasonably diligent person would take to minimise potential losses to creditors if they conclude (or should have concluded) that there is no reasonable prospect of the company avoiding insolvent liquidation or administration.

The bill creates an assumption that a director is not responsible for any worsening of the financial position of the company, or its creditors, that occurs between 01 March and 30 June 2020 (or one month after the coming into force of the new Act, if later).

This change is not, however, a blanket immunity for directors and no changes are made to the law relating to misfeasance or fraudulent trading, or to section 172 of the Companies Act 2006 which contains a similar duty requiring directors to consider and act in the interests of creditors.

Termination clauses in supply contracts

The Bill introduces changes which will prevent suppliers (typically utility providers) terminating supply contracts or varying their terms where a company has entered an insolvency procedure or obtained a moratorium.  There are safeguards to ensure that suppliers can be relieved of their obligation to supply if it causes hardship to their business, and there is a temporary exemption for “small company” suppliers during the pandemic.

Meetings and filing dates

The Bill contains provision for holding virtual AGM’s and allows scope for extending the existing submission deadlines for the filing requirements at Companies House.  Filing dates for the accounts of public companies are temporarily extended.