UPDATE: The Corporate Governance and Insolvency Act 2020 received Royal Assent on Thursday 25th June 2020 and came into effect on Friday 26th June 2020.
On Wednesday 20 May 2020, the Corporate Insolvency and Governance Bill was laid before Parliament. The measures contained in the Bill are designed to provide support to businesses during the coronavirus pandemic and aid economic survival and recovery. The Bill will apply in England & Wales and is expected to come into force on the day after it is enacted. MPs will consider the Bill on 3 June 2020.
The Bill introduces a new statutory moratorium for “eligible entities”. Eligible entities will include companies registered under the Companies Act 2006 in England, Wales and Scotland and limited liability partnerships, subject to certain exceptions (such as insurance companies and banks).
The moratorium prevents creditors from instigating insolvency proceedings against the company and allows the directors to retain control without the threat of creditor pressure. The directors retain the right to place the company into liquidation if rescue efforts fail.
The new statutory moratorium will provide eligible businesses with an initial break of 20 business days to consider a rescue plan. During this period, the activities of the company must be reviewed by an insolvency practitioner who performs the role of “monitor”. It will be possible to extend the 20-day period by a further 20 business days. Longer extensions will also be available but only with the consent of creditors or approval from the Court.
The Bill introduces a new restructuring plan for businesses which can be proposed by the directors, members or creditors where financial difficulties are affecting, or likely to affect, the business’ ability to trade as a going concern. The new procedure is largely based on existing provisions for schemes of arrangement with the addition of a ‘cross-class cramdown’, which will bind secured and unsecured creditors.
The purpose of the restructuring plan must be to eliminate, reduce, prevent or mitigate the effect of the business’s financial difficulties; it will require approval from the Court. A plan will only be approved if it is just and equitable to do so.
The Bill also includes provisions to invalidate contractual termination provisions in contracts for the supply of goods and services triggered by insolvency proceedings. Under the new provisions, suppliers will be prohibited from relying on such clauses and ceasing to provide supplies to a business as long as the business continues to pay the supplier for what it receives.
There are some exclusions to protect small suppliers and to safeguard against the risk of hardship to those suppliers.
The Bill will suspend potential liability for wrongful trading under the Insolvency Act 1986 for the period 1 March 2020 to 30 June 2020. The new provisions in the Bill require the Courts to assume that a director is not responsible for any deterioration to the company’s financial position or its creditors during the relevant period. The provisions remove some of the personal risks for directors where a company is in financial distress (although directors’ duties under the Companies Act 2006 are not affected and therefore the risk of misfeasance claims during the relevant period remains).
Statutory demands and winding up petitions
The Bill introduces temporary restrictions on the presentation of statutory demands and winding up petitions against companies, where the company’s inability to pay its debts is due to the economic impact of the coronavirus. Where there are reasonable grounds to attribute the company’s inability to pay to the effects of the coronavirus, any statutory demands served on the company during the period 1 March and 30 June 2020 will be voided. Similarly, creditors will be restricted from presenting a winding up petition against the company during the period 27 April to 30 June 2020.
If the company’s inability to pay is not linked to the economic impact of the coronavirus, a statutory demand or winding up petition can still be presented.
Meetings and filings
The Bill also temporarily eases filing and meeting requirements for companies under the Companies Act 2006. The Bill temporarily permits companies to hold a general meeting or annual general meeting by alternative means (including electronically) where the company’s constitution does not provide for it. This measure will apply retrospectively from 26 March 2020 to any companies who have held socially distant meetings and who, as a result, have not complied with their constitution. Companies who have postponed their AGM will be given a limited period after the Bill comes into force, to hold the meeting in accordance with these new measures.
The Companies House filing deadlines for accounts, confirmation statements and registration of charges will also be extended temporarily by the Secretary of State.
The Bill still has some way to go before receiving Royal Assent and becoming law. However, the new legislation will be welcomed by businesses, who face hardship due to the economic impact of the coronavirus pandemic.
How we can help
For further information about the Corporate Insolvency and Governance Bill, and how this may impact your business, or for information about restructuring and rescue generally, please speak to your usual Druces contact or to: