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Corporate Insolvency and Governance Act 2020

Posted on 27 May 2020

Insolvency Aspects

On 25 June 2020 the Government passed the Corporate Insolvency and Governance Act 2019-21 (the "Bill").  The Bill received Royal Assent the same day, and the Corporate Insolvency and Governance Act 2020 (the "Act") came into force on 26 June 2020.

The Act 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 range of businesses.  Having passed through Parliament, the Act also contains some notable amendments to the original Bill.This note sets out a brief summary of the Act's key provisions in relation to insolvency proceedings, and the key changes from the original Bill.

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, or 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.

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include both Creditors' Voluntary Arrangements and the presentation of a winding up petition that is not subsequently withdrawn.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.

It is worth noting that the Act contains provisions that give priority to new debts (i.e. not arising from a pre-existing obligation) incurred during the course of a New Moratorium (referred to as "Moratorium Debts") in certain circumstances. Specifically, moratorium debts will have a "Super-Priority" over all other debts if the company enters into further insolvency proceedings within 12 weeks of a New Moratorium ending. 

However, the Bill was amended by Parliament such that, under the Act, any debts which fell due during a New Moratorium as a result of the acceleration of a loan or similar will not constitute Moratorium Debts for this purpose.

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 to 31 December 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:

  1. coronavirus has not had a financial effect on the company against which they are bringing the petition, or;
  2. 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 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 30 September (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).

This protection expired on 30 September 2020, so any future changes in a company's financial position will not be subject to this presumption. It should also be noted that the protection for the period up to 30 September 2020  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.

Restrictions on termination of contracts for supply of goods and services

Potentially the most widely significant measure in the Act is the 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.

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