Corporate Insolvency and Governance Bill 2020 update

At the end of March, the Business Secretary announced a number of measures aimed at assisting companies during these uncertain times as businesses respond to the financial difficulties caused by the pandemic.

Since that announcement there had been no further details and questions of how the measures would work in practice were left unanswered. However, on 20 May 2020, the Corporate Insolvency and Governance Bill 2020 (“the Bill”) was issued and is likely to be enacted before the end of June. The Bill contains a number of measures and we are now able to provide an update on the proposed measures.

Wrongful Trading

The changes to the wrongful trading provisions will apply from 1 March 2020 to 1 month after the enactment of the Bill.

The Bill states that in circumstances where the Courts are deciding what contribution a director is to make to the company assets, they are ‘to assume that the person is not responsible for any worsening of the financial position of the company or its creditor that occurs during the relevant period’. This is not a blanket suspension on all director duties and directors should continue to comply with general duties, including acting in the best interests of creditors if the company is insolvent or likely to become insolvent.

It is unclear whether the assumption above is rebuttable. Additionally, directors will still be liable for wrongful trading up to the relevant period and that the relevant period could leave directors facing liability for wrongful trading particularly if they have committed to a course of action which takes a number of months to be successful.

Winding-up Petitions

The Bill also places temporary restrictions on winding-up petitions. The relevant period runs from 27 April 2020 to 1 month after the enactment of the Bill. The Bill prevents petitions for the winding up of companies presented after 27 April 2020 based on a failure to satisfy a statutory demand served between 1 March and 30 June or 1 month after enactment.

Additionally, a creditor will not be able to present a winding-up petition based on the normal grounds of insolvency during the period above unless they are able to prove that they have ‘reasonable grounds for believing that coronavirus has not had a financial effect on the company’.

The Bill also allows the court to make orders in relation to petitions presented before the relevant period. The orders could restore the position to what it would have been if the petition has not been presented.

Finally, the Bill disapplies the rules relating to advertisement of petitions during the relevant period until the court has made an assessment of the impact of Coronavirus on the company.

Moratoriums

As mentioned in a previous blog post, a moratorium is a mechanism by which a company is protected against creditors. It is currently only available to those companies in administration or small companies subject to company voluntary arrangements. The Bill extends the availability of such moratorium protection.

Entry into the moratorium will be commenced by the directors filing certain documents at court including a statement confirming that ‘in their view, the company is, or is likely to become, unable to pay its debts’. A monitor will be appointed to oversee this process, however, control of the company will remain with the directors. The monitor will be required to assess whether it is likely the company can be rescued as a going concern.

The Bill currently provides for the moratorium to initially last for 20 business days only which can be extended by another 20 business days without creditor consent. Creditors will be able to challenge their actions if they feel that the company’s affairs have been managed in a way which is unfair and has harmed the interests of the creditors.

New Restructuring Plan

The Bill introduces a new restructuring plan similar to the current scheme of arrangement. The plan will allow companies facing financial difficulties to make proposals for compromise to creditors. Creditors will be able to vote on proposals and the court will have any involvement. A plan will be approved if 75% of creditors in value consent to it.

In addition, the plan will allow proposals to be sanctioned by the court despite classes of creditors voting against it. This will result in dissenting creditors being bound by the plan as well as those who approved it. This can be subject to certain measures intended to protect those dissenting creditors including that those dissenting would not be ‘worse off than they would be in the event of the relevant alternative’.

The new restructuring plan will be available not only to companies who have encountered financial difficulties but those ‘likely to encounter, financial difficulties that … will or may affect, its ability to carry on business as a going concern’.

The new restructuring tool will be welcomed by many companies and it will be interesting to see how it works in practice for those who do utilise it.

Termination of Supply Contracts

The Bill includes provisions which will place a prohibition the termination of supply contracts. Any supply contract that allows for insolvency to be used as a termination event will be void.

The current legislation prevents essential supplies from being terminated such as the supply of electricity and gas however, the Bill extends this and will apply to the supply of goods and services in general.

The Bill also includes temporary provisions which exclude these provisions for small suppliers. During the relevant period the provisions will not apply in relation to a supplier which meets at least two of the following criteria:

• Their turnover is not more than £10.2 million;
• Their balance sheet total is not more than £5.1 million;
• The number of employees is not more than 50.

The relevant period is likely to be just one month after the legislation comes into force.

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Next Steps

The Bill will pass through Parliament quickly and become law by the end of June. If you need any further assistance, contact Lee Bramley with any queries.

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