The Corporate Insolvency and Governance Bill 2019-21 (Bill) was published on 20 May 2020.
The Bill is not yet in force and MPs are due to consider all stages of the Bill on 3 June 2020. The purpose of the Bill, as set in the explanatory notes, is to provide breathing space to UK companies that are facing the threat of insolvency due to trading difficulties caused by the COVID-19 pandemic. The progression of the Bill through Parliament is expected to be expedited.
A key objective of the Bill is to provide businesses with the flexibility and breathing space they need to continue trading and to comply with their legal obligations in the difficult conditions arising from the COVID-19 pandemic. The Bill actually provides for amendments to be made to the Insolvency Act 1986 (IA86) and the Companies Act 2006 (CA2006).
We have summarised the key areas you need to be aware of below.
A new statutory moratorium process
This will be available to companies and LLPs that are, or are likely to become, unable to pay their debts as a result of the current crisis. The company must make an application to the court for the moratorium.
A company is unable to make the application where a winding-up petition has been issued and remains outstanding. The court must be satisfied that the moratorium would achieve a better result for the company’s creditors as a whole than if the company was placed into liquidation following the making of a winding-up order. Whether the courts can or will adopt a similar approach in ongoing winding-up petitions however remains uncertain.
The company must obtain advice from an insolvency practitioner prior to making the application as a certificate from an insolvency practitioner certifying that, in their view, it is likely that a moratorium would result in the company being rescued as a going concern must be filed with the court with the application.
The moratorium will protect the company from proceedings being commenced against it without the permission of the court. There are certain proceedings where the application for permission cannot be made which includes the appointment of an administrator by a qualifying floating charge holder.
The insolvency practitioner will act as a monitor of the company throughout the course of the moratorium. The monitor is under a duty to monitor the affairs of the company to ensure that the effect of the moratorium will result in the company being rescued as a going concern. The monitor is entitled to rely upon information provided by the company unless the monitor has reason to doubt the accuracy of what is being provided.
The Bill does not set out the extent of the monitoring requirement and whether the monitor needs to be on site or involved in decision making. We suspect that this will vary on a case by case basis depending on the size and nature of the business and the industry that the business is in. The monitor has the ability to apply to the court for directions. It is of note that a creditor or any person affected by the moratorium has the ability to challenge the acts or decisions of the monitor by way of a court application. This includes the ability to challenge the remuneration of the monitor.
There are a number of restrictions on the company throughout the course of the moratorium which should be considered prior to any application being made.
The moratorium will last for an initial period of 20 business days but may be extended without creditor consent for a further period of 20 business days and with creditor consent or by the court for up to a year or more. The company must publicise the fact that it has the benefit of the moratorium.
The company must confirm to the court that the debts arising during the moratorium period have been discharged along with any debts arising prior to the moratorium where a payment holiday has not been agreed. This would suggest that suppliers, employees, landlords, loan repayments, etc will need to be paid during the period of the moratorium and the process cannot be used as a way of continuing to trade but avoiding paying creditors in that time.
Companies required to continue to supply to insolvent businesses
The Bill recognises the fact that the supply of goods and services may need to be protected when a company goes into a formal insolvency procedure. Under the Bill, the new statutory moratorium is included as a formal insolvency procedure.
The Bill provides that any clause in a supply agreement that automatically terminates the supply agreement or would entitle the supplier to terminate the agreement ceases to have effect when the company enters into a formal insolvency situation.
The supplier is unable to make it a condition of the continued supply that any outstanding charges are paid. The company must however pay for the supplies that are provided in the relevant period.
This also applies if the reason to terminate arises before the formal insolvency procedure is put in place and applies for the period in which the insolvency procedure is in place. It is possible however for the contract to be terminated with the permission of the office holder, the company or the court.
Small suppliers are excluded from the requirements set out above. To qualify as a small supplier, the supplier must satisfy at least two of the three conditions set out within the bill.
Restructuring arrangements
The Bill provides for a company, its creditors or members or any appointed liquidator or administrator to make an application to the court for the court to order that a meeting of the company’s creditors takes place to consider a restructuring plan. This is similar to the provisions that are already in place for a scheme of arrangement and is intended to avoid a formal insolvency procedure being required.
Every creditor whose rights are affected by the compromise or arrangement must be permitted to attend the meeting. The company’s secured creditors will also be bound by the arrangement and as such must be permitted to attend and vote at the meeting.
If 75% in value of the creditors, class of creditors, members or class of members (as the case may be) approve, then the court in all likelihood will sanction the arrangement. The court may still sanction the application even if the requisite 75% has not approved the arrangement in certain conditions.
Wrongful trading
The courts will ignore the period between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into effect) (whichever is later) when assessing the amount of compensation payable by a director who is subsequently found liable for wrongful trading.
The explanatory notes accompanying the Bill state that the objective of this measure is to remove the deterrent of a possible future wrongful trading application, so that directors of companies which are impacted by the COVID-19 pandemic may make decisions about the future of the company without the threat of becoming liable to personally contribute to the company’s assets if it later goes into liquidation or administration. This will in turn help to prevent businesses, which would be viable but for the impact of the pandemic, from closing.
With regard to certain lending institutions, insurance companies and friendly societies the suspension of the wrongful trading provision only applies if the deterioration of the company’s financial position was due to COVID-19.
The Act does not limit the application of misfeasance or breach of duty claims against directors. Accordingly, directors remain at risk of personal liability if the company later goes into an insolvency process and the directors failed to act in the best interests of creditors prior to the insolvency process when the company was in a parlous financial position or where the directors have acted negligently, recklessly or fraudulently.
Winding-up Petitions
The presentation of debt-related winding-up petitions is heavily restricted under the Bill.
The Bill generally provides that creditors shall not present winding-up petitions on the basis that a company is unable to pay its debts as and when they fall due, unless there are reasonable grounds for believing that COVID-19 has not impacted financially on the debtor company or, alternatively, that the debt issues would have arisen in any event.
It would be for the creditor to prove to the satisfaction of the court that the non-payment is for a reason other than connected with the current pandemic. We suspect that the courts will be reluctant to go against the terms of the Bill without strong evidence of a non-COVID-19 related reason for the debt not being satisfied.
The restriction relates to all winding-up petitions and not just those issued by landlords which is what has been previously suggested. This is only a temporary measure and the restrictions will be lifted. The Bill suggests that the restrictions will be in place until 30 June (or one month after the Bill comes into force) however in reality, the restrictions will probably still be in place until much later in the year to allow time for the economy to recover.
The restriction has retrospective effect and impacts upon:-
- Statutory demands that have been served from 1 March 2020
- Winding-up petitions that have been presented on or after 27 April 2020
- Winding-up orders that have been made since 27 April 2020
The Bill, as drafted, seeks to prevent the presentation of a winding-up petition by a creditor on or after 27 April 2020 where there is an unsatisfied statutory demand that has been served between 1 March 2020 and 30 June 2020 (or one month after the Bill comes into force, if later). This means that, when the Bill comes into force, a creditor will not be able to present a petition if that petition is based on a statutory demand that was served on or after 1 March 2020 effectively voiding that demand.
Further, the creditor will not be able to continue with any winding-up petition that has been issued at court which is based upon a demand that was served on or after 1 March 2020. It is unclear what will happen with the current petitions and the costs that have been incurred in the presentation of the petitions. We would expect that the petitions will be dismissed but with discretion on costs for the court. It seems unfair on the petitioning creditor not to be awarded its costs when it was permitted to issue the petition at the time. It is anticipated that a lot of the court’s time will be taken up with such costs arguments.
There are special provisions that are applicable where petitions are presented between 27 April 2020 and the Bill coming into force. If the debtor could prove that the non-payment was COVID-19 related and the terms of the Bill would have applied had it been in force, the court has the power to make a remedial order to restore the position as if a petition had not been presented.
Any existing winding-up order will be void where all of the following conditions are satisfied:
- A winding-up order has been made between 27 April 2020 and the day before the Bill comes into force;
- The winding-up order was made on grounds that company was unable to pay its debts;
- The winding-up order would not have been made by the Court under the new restrictions (as it would not have been satisfied that the debtor company's financial difficulties would have arisen despite COVID-19).
In such circumstances, there is no liability on any of the official receiver, liquidator or any provisional liquidator for anything done pursuant to the winding-up order. The court has the power to give directions for the purpose of restoring the company to its position before the petition had been presented.
If the official receiver or a liquidator believe that a winding-up order might be void, he or she has a duty to refer the matter back to court for a determination and the court will assess whether directions are required.
Where a petitioning creditor presents a petition and states it has the reasonable belief that COVID-19 has not impacted financially on the debtor company but the court disagrees with that reasonable belief, the court still has discretion to make a winding-up order if it is satisfied that the company's inability to pay its debts would have arisen anyway.
