The Corporate Insolvency and Governance Bill (CIGB) was published on 20th May and is designed to help businesses in difficulty that need to restructure, to increase their chances of survival during these turbulent times.
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Whilst wide-ranging reform of the insolvency legislation had been planned for some time, the unprecedented challenges caused by the COVID-19 pandemic forced the government to bring the timetable forward and squeeze a process that would normally take over a year into just six weeks.
The resulting 240 page Bill contains both temporary and permanent legislation that should support a culture of business rescue and restructuring during the current unusual times and beyond.
It should be noted, that given the speed with which the legislation was pulled together, the government has made it clear that it is likely to remain a work in progress with additions, amendments and corrections expected over time. Furthermore there are a number of areas where the government appears to have left it to the Courts to resolve any issues which are not made clear by the new legislation. Therefore trade creditors, landlords, lenders and directors will all need to take advice on their respective positions when operating with businesses in distress during the next few months.
The legislation is likely to be approved at its reading in Parliament on 3rd June and, once given the green light by the House of Lords, could receive Royal assent at the end of June.
The Insolvency Service, who helped draft the legislation, have made it clear that, given the evolving nature of the COVID-19 pandemic and the continuing economic challenges it is throwing up, the temporary measures are almost certain to be extended beyond the summer.
We’ve summarised the key elements of the Bill below – full details can be seen here.
- Allows directors of a struggling company (some companies, such as financial services firms, are excluded) to create a protective breathing space while they attempt to put a restructuring/turnaround plan together
- Known as a “debtor in possession” procedure, the directors remain in control, although their actions are overseen by a “monitor” who must be a licensed Insolvency Practitioner. The monitor’s role is to assess the viability of the plan as well as providing a safeguard to ensure that the directors are acting in the creditors’ interests generally
- The moratorium lasts for 20 business days and can be extended by a further 20 by the directors or up to a year if creditors or the Court agree
- No legal action can be taken while the moratorium is in force but costs incurred during the moratorium period have to be paid
- Whilst it is intended to be a survival tool by giving directors control, there is no requirement to seek the prior approval of a secured creditor such as a bank or asset-based lender. The bank’s security cannot ultimately be prejudiced and they would still have the right to enforce their security should they wish after the moratorium has expired, but there may be concerns that they could be excluded from key strategic decisions
- The new legislation allows a company in difficulty, or its creditors or members, to propose a restructuring plan, similar to the existing Scheme of Arrangement, as an alternative rescue option
- Provided a Court approves the plan as being fair and equitable and ensures creditors are no worse off than the next best alternative then it will bind both secured and unsecured creditors (unlike a CVA), including dissenting classes of creditors and members – this is known as a cross-class cramdown
- In this way, it is hoped companies can restructure financially and avoid insolvency
Termination / “Ipso Facto” clauses
- New legislation has been introduced to prevent suppliers of goods and services under a contract from terminating supply or amending terms to increase prices where a company enters an insolvency or restructuring process or implements a moratorium. This is similar to the existing rules for utility companies
- It only applies where a formal contract is in place (therefore not to ad hoc orders) and there is a current exemption for suppliers defined as small companies under the Companies Act (maximum of £10.2m turnover, £5.1m balance sheet or average of 50 employees)
- It also excludes financial services providers such as banks
- Supplies during the insolvency period must be paid for
- Suppliers can apply to Court if they feel it causes them undue hardship
As noted previously, a number of temporary measures have been brought in as a result of the COVID-19 pandemic. Whilst these provisions are due to run until 30th June (or one month after the Bill comes into force) it is expected, particularly in light of the recent extension of the Job Retention Scheme until October, that these measures will also be extended.
Suspension of wrongful trading liability
- As has been widely reported, effective from 1st March to 30th June (unless extended), the wrongful trading rules have been suspended. The threat of personal liability contained within this previous legislation acted as a deterrent to directors from continuing to trade where they had no reasonable prospect of avoiding insolvency. The removal of this threat now allows them to do their best to save a company in these unprecedented times
- It should be noted that, although the wrongful trading provisions have been temporarily removed, other similar Insolvency Act provisions covering fraudulent trading, transactions at an undervalue and preferences remain. Furthermore it does not relieve directors of a general fiduciary duty to act in the best interests of creditors, so care must still be taken. The best guidance is always to document key decisions and take independent professional advice
Statutory demands and Winding Up Petitions
- The new law is intended to temporarily prevent aggressive creditors from using the threat of legal action to enforce payment of a debt at a time of mass financial uncertainty
- It voids statutory demands made between 1st March and 30th June (unless extended)
- It also restricts the issue of Winding Up Petitions from 27th April to 30th June (unless extended)
- It should be noted that this generally only relates to situations where a non-payment is due to COVID-19 and there have been a number of legal cases recently which found in favour of the creditor because the Court felt COVID-19 was being wrongly used as an excuse not to pay a debt that had been outstanding for many months
Companies House formalities
A number of other changes have been introduced in relation to compliance with Companies House regulations:
- Those companies that are required to hold an AGM or General Meeting are now allowed to do so by “other means”. This has been applied retrospectively from 26th March therefore any meetings held since then which, in order to observe the social distancing guidance, did not technically comply with the rules, would not be in breach of the company’s constitution
- Shareholders’ rights to vote are unaffected but they may not be able to vote in person
- Extension of certain filing deadlines as the government recognise that the current COVID-19 challenges may make it difficult for companies to file statutory documents such as accounts on time