The Corporate Insolvency And Governance Act 2020 – An Overview

On Friday 26th June 2020, the Government’s Corporate Insolvency and Governance Bill was brought into legislation. After being published on 20th May, it has been urgently fast-tracked through Parliament to provide support to businesses across the UK who may become insolvent in the fallout of the coronavirus pandemic.

Objectives of the Corporate Insolvency and Governance Act

One objective of the Act is to help businesses avoid insolvency by offering them greater flexibility to survive Covid-19. Many of the changes introduced were permanent and brought in to try and create breathing space for companies and directors to see whether a company could be rescued.

The Act was something that had never been seen in English law before and had far-reaching consequences in many areas, as well as the world of insolvency. It was anticipated that there would be a large raft of insolvencies in the wake of the pandemic and there were certain changes brought in to try and enable viable businesses to trade.

The Corporate Insolvency and Governance Act contained a combination of permanent and temporary changes, some of which had been in the pipeline for years, and some of which were introduced due to the pandemic.

Corporate Insolvency and Governance Act – Permanent changes

1. Introduction of a company moratorium

This was modelled on the USA’s chapter 11 process where directors of insolvent, or likely to become insolvent, businesses can apply for a 20-business day moratorium period (which can be extended for up to one year).

The moratorium has the effect of pausing all action against the company while a licensed practitioner acts as a ‘monitor’ of the company and is for circumstances where a rescue of the company is likely.

This moratorium also restricts the rights of secured creditors and takes away the ability to control the insolvency process in a moratorium situation.

2. Introduction of a restructuring plan

Under a new restructuring plan, companies in financial difficulty could propose a compromise or arrangement between their creditors and/or members. An application for the restructuring plan could be made to the Court by either the company, creditor, member, liquidator or administrator and requires Court approval and 75% approval of each class of creditors.

However, the Court has the power to approve the arrangement without the appropriate creditor consent in some circumstances. This again potentially weakens the powers of the secured creditor.

3. Prohibition on termination clauses in supply contracts

The Corporate Insolvency and Governance Act introduced a change to the use of termination clauses in written supply contracts.

A supplier can no longer rely upon contractual terms allowing the supplier to stop supply or threaten to stop supplying when the customer has entered into an insolvency procedure except in limited circumstances.

Temporary changes in response to the coronavirus pandemic

1. Restrictions on winding-up petitions

The Corporate Insolvency and Governance Act provides that a winding-up petition that relates to a statutory demand served on, or after 1st March 2020 cannot be presented by a creditor during the period from 27th April to either 30th June 2020 or one month after the bill comes into force.

2. Suspension of wrongful trading liability

Under current insolvency laws, directors may be personally liable for business debts if they allow the company to continue to trade past the date upon which the director knew or ought to have known that the company cannot avoid liquidation or administration.

The Corporate Insolvency and Governance Act makes temporary changes to the existing wrongful trading provisions and has effectively suspended the offence of wrongful trading, so that the Court will assume that the person is not responsible for any worsening of the financial position of the company that occurs during the relevant period (from 1st March 2020 to 30th June 2020, or one month after the Act comes into force).

3. Changes to holding annual general meetings (AGMs) and general meetings (GMs)

Any company that is legally required to hold AGMs and GMs can now hold them virtually or by other means such as over the phone.

The new changes also extend the period within which an AGM must be held, although there is a provision to temporarily extend that period by up to three months at a time up to the current financial year.

4. Extensions to Companies House filing

Companies are required by law to file certain documents by specified deadlines at Companies House each year. Missed deadlines can lead to financial penalties and criminal sanctions for both the company and its directors.

The Act allows a temporary extension to these deadlines for certain filings including:

• Accounts;
• Annual confirmation statements;
• Notices of related relevant events; and
• Registration of charges under the Companies Act 2006.

What’s next?

Suppliers and lenders need to consider the impact of this act on their lending/extension of credit decisions and consider whether they need to amend their documentation and/or working practices. Directors also need to be aware of the changes.

We strongly recommend businesses and lenders consider the effects of the Act as soon as possible to ensure that they are fully equipped with adequate legal protection now the changes have come into effect.

For further information on the Corporate Insolvency and Governance Act 2020, click here.