On 20 May 2020 the Government put the Corporate Insolvency and Governance Bill 2019-21 (the "Bill") before Parliament.
The Bill 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. It remains to be seen to what extent the Bill will be amended during its passage through Parliament. However, in its present form it contains some potentially significant provisions, which are likely to be of interest to a range of businesses. A number of these measures have been publically announced by the Government, and so it is expected that they will be a part of the final legislation.
This note sets out a brief summary of the Bill's key provisions in relation to insolvency proceedings.
The Bill contains a new form of company moratorium (the "New Moratorium"), which can be obtained by companies to protect against actions by their creditors. Once in place, creditors will be prevented from commencing or continuing legal proceedings, enforcing security, bringing winding up petitions, or seeking to appoint administrators. Conversely, the company will be significantly restricted in the actions that it can take during the period of the New Moratorium.
A company is eligible to seek such a moratorium unless it falls within one of the categories of exempted types of company and/or is or has been subject to a moratorium or insolvency proceedings in the past twelve months. It is worth noting that, for these purposes, "insolvency proceedings" include both Creditors' Voluntary Arrangements and the presentation of a winding up petition which is not withdrawn. If the company is currently subject to a winding up petition then the Court must also be satisfied that a moratorium for the company would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up.
In order to obtain a New Moratorium the directors of the company must apply to the Court. A "qualified person" (an Insolvency Practitioner) must support the application and, if the New Moratorium is granted, 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 Bill prohibits the filing of winding up petitions in respect of statutory demands made during the "relevant period" (i.e. between 1 March and at least 30 June 2020).
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, will be void.
Suspension of Wrongful Trading
The Bill provides that, when calculating a director's liability for any negative change in a company's financial position as a result of wrongful trading, there will 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 at least 30 June 2020.
It should be noted that this is a limited protection, 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. However, it should give directors a degree of comfort for continuing to trade their businesses whilst at risk of becoming insolvency due to the ongoing crisis.
Restrictions on termination of contracts for supply of goods and services
Potentially the most widely significant measure in the Bill 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 Bill, 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.
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