The Corporate Insolvency and Governance Bill (“Bill”) is currently going through Parliament and, if approved, will introduce wide-ranging changes to the UK’s corporate insolvency regime. The Bill includes a number of measures designed to protect businesses which are struggling as a result of the coronavirus pandemic. Some of these measures are temporary, however parliament may decide to extend these if necessary.
The key measures included in the Bill are summarised below.
1. Suspension of wrongful trading provisions
Under the Insolvency Act 1986, the wrongful trading provisions allow insolvency officials to examine the conduct of directors with a view to potential personal liability. This applies if companies continue trading past the time at which there is no reasonable prospect of avoiding insolvency, and the directors fail to take measures to minimise losses to creditors, thereby worsening the company’s financial position.
The Bill will temporarily suspend these wrongful trading provisions for a period of four months from 1 March 2020 until one month after the Bill comes into force. This removes the threat of personal liability on directors for any financial losses during this period. However, it should be noted that directors’ duties to their creditors continue and liquidators and administrators will not be prevented from bringing claims against directors for breaches of such duties.
2. Statutory demands and winding-up petitions
Two key measures are being introduced to restrict aggressive debt-recovery actions during the Covid19 pandemic.
Firstly, statutory demands served between 1 March 2020 and 30 days after the coming into force of the Bill (expected to be in late June or early July) cannot be used in support of winding-up proceedings commenced on or after 27 April 2020. These statutory demands will essentially be void, which will therefore prevent them from being used as a debt-recovery tool.
Anyone who is owed more than £750 by a company can serve a statutory demand on it, demanding payment of the amounts owed. If the company fails to pay the amounts owed within 21 days, or does not otherwise challenge the demand in court, it is deemed to be insolvent. The creditor can then initiate winding-up proceedings and rely upon the unanswered statutory demand as proof that the company is insolvent and should be wound-up.
Secondly, the Bill also prevents the follow-on winding-up proceedings from being commenced by a creditor from 27 April 2020 to 30 days after the Bill comes into force unless it has reasonable grounds for believing that:
- coronavirus has not had a “financial effect” on the company (the Bill provides that coronavirus will be deemed to have a financial effect on a company if its “financial position worsens in consequence of, or for reasons relating to, coronavirus”); or
- the grounds which exist to wind-up the company would have existed even if coronavirus had not had a financial effect on the company.
A company can now obtain a 20 business day moratorium to provide some breathing space whilst they explore restructuring options or seek new investment. The moratorium is available to all companies with limited exceptions, such as financial institutions. To obtain the benefit of the moratorium, the directors must state that the company is, or is likely to become, unable to pay its debts.
The moratorium will be overseen by a ‘monitor’ who must be a licensed insolvency practitioner, but the directors will remain in charge of running the business on a day-to-day basis.
The directors will be able to extend the initial 20 business day moratorium, however this cannot be done until the last five business days of the initial period. The moratorium can be extended for a further 20 business days without creditor consent, but any further extension beyond 40 business days will require the consent of the creditors or the court.
A new procedure is to be introduced which will allow a company in financial difficulty to propose a restructuring plan that compromises certain creditors or classes of creditors. A restructuring plan is available to both solvent and insolvent companies which satisfy two conditions:
- the company has encountered, or is likely to encounter, financial difficulties which are affecting, or will or may affect, its ability to carry on business as a going concern; and
- a compromise or arrangement is proposed between the company and (a) its creditors, or any class of them, or (b) its members, or any class of them, and the purpose is to eliminate, reduce or prevent, or mitigate the effect of any such financial difficulties.
If 75% of the voting creditors agree on a restructuring plan, the court may sanction that arrangement. Where there are dissenting creditors, if the court is satisfied that those creditors will be no worse off than if the company entered an alternative insolvency procedure, the court can again sanction that they are bound by the restructuring plan.
Termination clauses in supply contracts
Where a company has entered an insolvency or restructuring procedure and obtains a moratorium, the company’s suppliers will not be able to terminate or vary the contract, for example, by amending the payment terms. This means that suppliers will need to continue to supply goods and services (such supplier can insist on payment for such further supplies) to an insolvent company, even when that supplier may be owed significant sums of money by the company. A supplier cannot require pre-insolvency debts to be paid as a condition of making further supplies. The measure also contains safeguards to ensure that suppliers can terminate contracts if the company consents or if the court is satisfied that the continuation of supply would cause hardship to their business. The measure does not apply to small company suppliers.
The purpose of this change is to preserve the insolvent company’s supply contracts and maximise the opportunity for rescue of the company or the sale of the business as a going concern.