A temporary lifeline for the hospitality industry – The Corporate Insolvency and Governance Act 2020

It has been six months since lockdown began. The Hospitality industry, being amongst the worst hit industries, is on its knees. The Eat Out to Help Out scheme has provided a welcome boost and now the Furlough Scheme is being rolled back.

Without a massive turnaround in footfall, which historically has been offered by office workers and tourists, the outlook for the hospitality sector continues to look bleak. With this in mind, the Corporate Insolvency and Governance Act (The Act) may provide some welcome relief until customer traffic and spending return to historic levels.

The Act came into force on 26 June 2020. It contains a number of measures relating to both insolvency proceedings and corporate governance, for the most part intended to provide companies and their directors with greater protection and flexibility during the COVID-19 crisis, which are likely to be of interest to a wide range of businesses.

Restrictions on termination of contracts for supply of goods and services

Potentially, the most widely significant measure in The Act is the proposed restrictions on contractual rights of third parties to terminate contracts for the supply of goods and services in the event that a company becomes subject to insolvency proceedings.

Under The Act, subject to a temporary exemption for certain small suppliers, contractual provisions allowing a supplier of goods and services to terminate the contract upon their counterparty becoming subject to insolvency proceedings (and other provisions triggered on insolvency), will cease to have effect upon the counterparty becoming subject to a moratorium or insolvency proceedings.

Where this occurs, the supplying party will only be able to terminate the contract with the consent of the relevant office holder or the company, or with the permission of the Court. It also prohibits the suppliers from withholding further supplies pending payment of outstanding debts, or taking any steps in relation to those historic arrears. However, any further supplies made during the moratorium or insolvency proceedings will have to be paid in full.

Company Moratorium

The Act establishes a new form of company moratorium (the New Moratorium), which can be obtained by companies to protect against actions by their creditors. Once a New Moratorium is in place, creditors will be prevented from commencing or continuing legal proceedings, enforcing security and bringing winding up petitions against or seeking to appoint administrators over, the company. Conversely, the company will be significantly restricted in the actions that it can take during the period of the New Moratorium. In order to obtain a New Moratorium, the directors of the company must apply to the Court confirming that in their view the company is (or is likely to become) unable to pay its debts. A "qualified person" (an Insolvency Practitioner) must support the application by confirming that it is likely to result in the rescue of the company as a going concern, and that if the New Moratorium is granted, the person will act as a "monitor" of the company during the period of the New Moratorium. Once granted, the New Moratorium will last for an initial period of 20 business days. This can be extended by a further 20 business days at the directors' discretion (provided that they are satisfied and confirm to the Court that the relevant requirements are met). Any further extensions require the agreement of the company's creditors, or an application to the Court.

Statutory demands and winding up petitions

The Act prohibits the filing of winding up petitions in respect of statutory demands made during the "relevant period". The relevant period for this purpose was originally between 1 March and 30 September 2020 (extended from 30 June in the Bill). It has now been extended twice more and is currently set to last to 31 March 2021.

Creditors are also prohibited from filing winding up petitions against a company unless they believe, and are willing to confirm to the Court, that either:

coronavirus has not had a financial effect on the company against which they are bringing the petition, or;
the facts by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company.

Further, any winding up orders made on or after 27 April, but prior to the legislation coming into force, are void.

Suspension of wrongful trading

The Act provided that, when calculating a director's liability for any negative change in a company's financial position as a result of wrongful trading, there would be a presumption that the directors of a company are not responsible for any worsening of its financial position during the period 1 March 2020 to 30 September 2020 (extended from 30 June 2020 under the Bill). The Government also confirmed that this is intended to be a non-rebuttable presumption (i.e. it will not be open to the Courts to find that a director's actions have in fact caused a negative change to the company's financial position during this period).

Having allowed this provision to expire on 30 September 2020, on 26 November 2020 the Government brought into force regulations reviving this protection for the period 26 November 2020 to 30 April 2021.

It should also be noted that the protection for the periods from 1 March 2020 to 30 September 2020 and 26 November 2020 up to 30 April 2021 is limited, relating only to directors' potential liability for wrongful trading. It does not have any impact on directors' duties generally, or on liability for fraudulent trading, for example.

What does this mean for you?

The Government has thrown businesses (or at least those that qualify), a temporary lifeline.

The ability for landlords and other suppliers to bring proceedings for overdue rent and trade debts will be severely curtailed. This gives leisure and retail operators valuable breathing space, but this is temporary.

Any New Moratorium secured by a Company will eventually come to an end. Operators will need to be able to establish a sustainable business, and it appears that social distancing will be in operation for some time. What can we expect?:

Cost cutting appears to be inevitable.
Medium to long term arrangements with landlords will have to be agreed as current lease arrangements are not fit for purpose.
Technology filling the gap between social distancing requirements and the need to serve customers. It seems that interest in software and Apps that allow menus to be picked up on mobile phones and orders made direct to an Electronic Point of Sale (EPOS) is at an all-time high.
Suppliers may take a different view on credit terms when they know that you are protected from debt claims. Cash on delivery (and the costs associated with it) may become standard trading terms.

If you wish to discuss any of these issues at greater length or better understand how they will impact your business, contact Larry Nathan, Corporate Partner.