Corporate Insolvency and Governance Bill which received Royal Assent on 25 June 2020 and came into force as the Corporate Insolvency and Governance Act 2020 on 26 June 2020.
The purpose of the Bill is to provide businesses with greater flexibility and breathing space which is much needed for businesses trading through the difficult trading conditions as a result of the Covid 19 pandemic. The Bill provides for amendments to the Insolvency Act 1986 (IA86) and the Companies Act 2006 (CA06).
The headline provisions in the new Act are summarised below:
New statutory moratorium
This is available to companies and LLPs that are, or are likely to become, unable to pay their debts, as a result of the current crisis but where it is considered likely that a moratorium would result in the company/LLP being rescued as a going concern. The moratorium is for an initial period of 20 business days and an application has to be made to Court. This initial period can be extended by a further 20 business days by the directors (without any involvement of creditors). The moratorium can be further extended for a period up to one year (in total) with the consent of creditors, or a longer period if ordered by the court.
The Company MUST obtain advice from a Licensed Insolvency Practitioner prior to making the application to Court and The Licensed Insolvency Practitioner must certify that, in their opinion, a moratorium would result in the Company being rescued as a going concern.
The moratorium protects the Company from legal proceedings being commenced or continued without the permission of the Court.
If the Court grants the Company with a moratorium the Licensed Insolvency Practitioner will act as a Monitor. The Monitor is under a duty to monitor the affairs of the Company to ensure that the effect of the moratorium will result in the Company being rescued as a going concern.
There are a number of restrictions placed on the Company while under the moratorium which include paying creditors for the period of the moratorium. Therefore, the moratorium can’t be used to avoid paying on-going creditors.
The role of the Monitor will develop over the next few months and the level of their involvement will depend on the size of the business. The Monitor will have the power to apply to Court for directions especially if the Monitor has reason to doubt the financial information provided by the Company during the period of the Moratorium.
New restructuring plan
The new restructuring plan (the Plan) is modelled on the existing scheme of arrangement (“Scheme”) provisions in the CA06 and has been described by some as the UK equivalent of Chapter 11 in the USA.
It enables eligible companies to propose a compromise with creditors and/or members, or any class of them. A plan will have the ability to bind secured creditors as well as unsecured creditors. There will be an initial court hearing to examine class composition, creditor meeting(s) to vote on the Plan and a subsequent court hearing to sanction it.
If 75% in value of the creditors, in each class and members approve a plan then the Court in all likelihood will sanction the plan. The Court may still sanction the Plan even if the requisite 75% in value has not approved the plan in certain conditions.
Prohibition on presentation of winding-up petitions (temporary Covid 19 provision)
No petition for the winding up of a registered company can be presented on or after 27 April 2020 where the demand was served during the “relevant period”, which is defined as the period from 1 March 2020 to 30 September 2020. Similar provisions apply to petitions in relation to unregistered companies.
In addition, a petition cannot be presented by a creditor during this period on other evidence of inability to pay debts, unless the creditor has reasonable grounds for believing that coronavirus has not had a financial effect on the debtor or that the debt issues would have arisen anyway, ie, the debtor would have been unable to pay its debts even if Covid 19 had not had a financial effect on the debtor.
Suspension of wrongful trading provisions (temporary Covid 19 provisions)
A director will be assumed by the Court to not be responsible for worsening the financial position in the “relevant period” (defined as from 1 March 2020 to 30 September 2020). Liquidators and administrators will therefore be unable bring claims for wrongful trading against an insolvent company’s directors for any losses caused by trading during this period. However, directors’ duties to their creditors during the period continue and it will not prevent liquidators and administrators bringing claims against directors for breaches of such duties. The suspension will not apply to directors of most financial institutions such as building societies, credit unions and insurance companies. A director will continue to be responsible for Fraudulent Trading during this period and sometimes there can be a fine line between Wrongful Trading and Fraudulent Trading, therefore, Directors are encouraged to take independent advice from a Licensed Insolvency Practitioner if they are experiencing cash flow difficulties.
Prohibition on suppliers terminating contracts in the event of insolvency pursuant to termination provisions in contracts (referred to as ‘ipso facto’ clauses)
There are existing measures in the IA’86 (s233 and s233A) to stop certain suppliers of essential services (such as utility companies), from stopping supplies only by reason of the company’s insolvency and where their ongoing supplies during the insolvency will continue to be paid for.
The Act contains provisions that will prohibit all suppliers from stopping supplies to a company due to it becoming subject to insolvency proceedings (which includes the new restructuring plan and moratorium as well as the existing insolvency procedures), if the supplies continue to be paid for.
It will also prevent suppliers from amending their contractual terms in order to force increased payments. Suppliers can be relieved of the obligation to continue supplies if it causes hardship to the supplier’s business (although what will constitute ‘hardship’ is currently uncertain) and there is also a temporary exclusion for ‘small suppliers’ that have supplied services to an entity and that entity has entered into insolvency proceedings in the one month period immediately after the date the Act comes into force. To fall within the meaning of a small supplier, the supplier will need to meet two of the following three criteria (i) the average number of their employees was not more than 50, (ii) have a balance sheet with assets totalling £5.1 million or below, and (iii) have a turnover of £10.2 million or below.
If you need further advice from a Licensed Insolvency Practitioner please feel free to contact Alan Coleman or James Fish who are both Licensed Insolvency Practitioners and authorised by The Institute of Chartered Accountants in England and Wales on 01616080000.