Temporary Corporate Insolvency Provisions Extended Again

On Friday, 26^th March 2021, the Government confirmed that they have extended a number of temporary measures included in the Corporate Insolvency and Governance Act 2020 (the Act) to support businesses who are continuing to struggle as a result of the pandemic.

Corporate Insolvency and Governance Act measures extended

1. Free-standing moratorium for UK businesses

This permanent provision was designed based upon 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 a business whilst a licensed practitioner acts as a ‘monitor’ of the company and is for circumstances where a rescue of the business 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.

Under a temporary modification to this permanent provision, a business could enter a moratorium had it been subject to an insolvency procedure during the previous 12 months or was subject to a winding-up petition. This temporary modification has been extended to 30^th September 2021.

2. Prohibition on termination clauses in supply contracts

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

Under the provision, a supplier could 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.

Additionally, small suppliers are exempt from the requirement to supply until 30^th June 2021 (previously, 30^th March 2021) so that they can protect their company, if required.

3. Restrictions on winding-up petitions

The Act placed a temporary provision which prevented a winding-up petition from being presented to Court that relates to a statutory demand served between 1st March 2020 and 30^th March 2021 (the ‘relevant period’). The relevant period has been extended from 30^th March 2021 to 30^th June 2021.

Until the end of the extended relevant period, no winding up petition can be presented unless the creditor has reasonable grounds for believing that the pandemic has not had a direct financial impact on the business, or, the position that the business is in would have happened regardless of Covid-19.

4. Suspension of wrongful trading liability

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

The Act made temporary changes to the existing wrongful trading provisions, and effectively suspended the offence of wrongful trading, so that the Court assumed that the person was not responsible for any worsening of the financial position of the company that occurred during the relevant period (from 1st March 2020 to 30th September 2020).

The temporary provision expired on 30^th September 2020, but as a result of new regulations, was revived. This measure now applies for the period 26th November 2020 to 30 June 2021.