The Government has introduced the draft Corporate Insolvency and Governance Bill 2019-21 (Bill), which introduces changes to Company and Insolvency laws directed at easing the burden on businesses during the COVID-19 crisis and giving them flexibility to enable them to continue to trade, and promote their chances of survival.
There are three main measures to be implemented by the Bill, by way of amendments to the Insolvency Act 1986, the Companies Act 2006, and the Co-operative and Community Benefit Societies Act 2014:
- The introduction of a statutory insolvency moratorium, to help companies maximise their chances of survival by giving them the breathing space to look at options for rescue while supplies are protected;
- The temporary and retrospective suspension of the wrongful trading provisions in the Insolvency Act, to protect companies from aggressive creditor action and to support directors to continue to trade without the fear and threat of personal liability; and
- The temporary relaxation of filing requirements and the ability to hold virtual general meetings.
Statutory insolvency moratorium
The Bill outlines a new moratorium process, which will be available to those companies, Limited Liability Partnerships (LLPs), and registered societies which are (or are likely to become) unable to pay their debts. The object of the moratorium is to facilitate a rescue of the company, which could be via:
- a company voluntary arrangement (CVA), which is an existing procedure available under the Insolvency Act 1986, that enables a company that is in financial difficulty, but is not necessarily insolvent, to make a binding compromise and arrangement with its creditors
- a restricting plan (as the Bill would also introduce); or
- an injection of new funds.
Under this process, an insolvency practitioner will certify that she or he considers a moratorium would enable the company to be rescued as a going concern. The moratorium will apply for an initial 20 business-day period, which may be extended for a further 20 business days without the consent of creditors. If creditors give their consent, or with the approval by the court, the moratorium may be extended for up to a year or longer.
New measures are to be introduced to allow companies or their creditors or members to propose a new restructuring plan proposal. This new procedure has been modelled on the existing procedure for schemes of arrangement. Under the new procedure, creditors and members are to be divided into classes and each class must vote on the proposal. The restructuring plan will need the approval of at least 75% by value and a majority by number of each class. These measures will also include a “cross-class cram down” feature to bind dissenting classes of creditors or members to a restructuring plan. This means that those creditors or members who oppose the proposal, but would not be financially disadvantaged by it cannot prevent the restructuring plan from proceeding. The restructuring procedure will apply to both solvent and insolvent companies.
Suspension of wrongful trading laws
The Bill also provides for the temporary suspension of the wrongful trading provisions in the Insolvency Act. Under those existing provisions, in certain circumstances company directors can be held personally liable for business debts in the event the company subsequently fails. The suspension is designed to give assurance to directors who are needing to make difficult decisions about the future viability of their companies and whether it is appropriate to continue to trade. The wrongful trading provisions will be retrospectively suspended for a four-month period from 1 March 2020 to 30 June 2020. It is important to note however that other directors’ duties, such as duties to creditors, and the existing laws relating to fraudulent trading will remain in place.
Winding up petitions
Temporary provisions are introduced by the Bill to limit enforcement action of debts which are unpaid owing to reasons relating to the Coronavirus pandemic. The Bill aims to protect businesses from eviction by landlords who may seek to use statutory demands and winding-up petitions to put pressure on tenants to pay outstanding rent immediately. The proposed measures will prevent any statutory demands made against companies in the period between 1 March 2020 and 30 June 2020 from being used as the basis of a winding-up petition at any point on or after 27 April 2020. The measure will apply to any winding-up petition presented in the period from 27 April 2020 to 30 June 2020 or one month after the coming into force of this Bill, whichever is the later.
Termination clauses in supply contracts
Traditionally when a company enters into a rescue, a restructuring or an insolvency procedure, suppliers can often cease supply by relying on a contractual termination clause, which is triggered by insolvency.
The Insolvency Act 1986 already contains certain protections to ensure key suppliers continue to supply the insolvent company provided the supplies are paid for. In order to assist businesses to continue to trade through a restructuring or insolvency, the Bill will widen the scope of these existing provisions to allow companies to prevent a broader range of suppliers from terminating a contract due to a company entering an insolvency procedure or formal restructuring.
Flexibility on filing and meeting requirements
In order to ease the administrative burden on companies and LLPs, the Bill will also provide the Secretary of State with the power to make regulations to extend deadlines for filing accounts and other documents with Companies House, during the period affected by COVID-19.
In addition, the Bill introduces temporary relaxations to enable companies and mutual societies (including community benefit societies, co-operatives, credit unions and friendly societies) to hold AGMs by virtual means, even if this is not permitted by their constitution, and to extend the period within which they must hold an AGM. The relaxation will apply for a temporary period from 26 March 2020 until 30 September 2020, with the power to extend that period for a further three months at a time, but not beyond the end of the current financial year. We have been advising clients on the impact of these changes on AGMs due to be held in the next few months.
The Bill has had its second and third readings in the House of Commons and had is second reading in the House of Lords on 9 June 2020. The Bill was then considered in committee on 16 June 2020. The third reading of the Bill in the House Lords is scheduled for 23 June 2020.
The Bill is considered by many to be controversial as in some respects it raises as many questions as it answers. Should you or your business need more support or advice on how the Bill may affect your existing contractual relations, or the effects of COVID-19 on your business more generally and your responsibility as directors, do not hesitate to contact Virginia Cooper, Thom Clark or another member of the Firm’s Insolvency and Asset Recovery team.
For further support and advice relating to the impact of COVID-19, please view our COVID-19 Advisory Service page.