Corporate Insolvency and Governance Bill 2020-UK
By Mark Silvester, Consultant SBP law, UK
What is Corporate Insolvency?
A company is insolvent if it is unable to pay its debts as they fall due (cash-flow insolvency), or has liabilities which exceed its assets (balance–sheet insolvency).
The Corporate Insolvency and Governance Bill 2020
These are challenging times for businesses and directors. Amidst the Coronavirus pandemic, there are immense financial pressures on many companies across widespread areas of the economy.
Consequently, the UK Government has announced some of the most significant changes to UK insolvency law in many years. These changes will mitigate some of the enormous economic damage caused by the pandemic and allow many businesses who have been affected by COVID-19 to trade on through these unprecedented times.
What are the new measures in place?
On 20 May 2020, the Government introduced the Corporate Insolvency and Governance Bill (“the CIGB”). Here, we focus on the six “insolvency measures” within the CIGB.
1. Company Moratoriums
The company moratorium proposed by the CIGB will provide a breathing space of twenty business days, extendable to forty business days.This will allow struggling businesses to be protected from aggressive creditors whilst evaluating a rescue plan.
Further extensions will be allowed if agreed by creditors or by a court. The company will remain under the control of its directors, but the process must be monitored by a licensed insolvency practitioner.
During the period of the moratorium, companies will be unable to provide security against their assets and will not be able to dispose of their property.
2. Termination clauses
Contracts for the supply of goods normally contain clauses which are breached by a failure to pay for goods on time, or by the entry by the recipient into insolvency.
If a company is already within an insolvency or restructuring process or has obtained a moratorium under the CIGB proposals, suppliers will be unable to rely on a breach of terms within contracts to stop supplying.
Companies will not be required to pay for past supplies whilst arranging their rescue plans.
Suppliers will also be unable to vary contract terms, for example by raising prices.
Payment will be required for current supplies made once a company is in an insolvency process or moratorium. However, if continuing to supply causes hardship to the supplier then they will be exempted from that requirement.
The CIGB restructuring provisions are aimed at rescuing companies, rather than what the government describes as entering “a value destructive liquidation process”.
Companies in financial distress, or their creditors or members, will be able to propose a new restructuring plan.
Complex debt arrangements will be able to be restructured and support provided for the injection of new rescue finance.
A cross-class clampdown will be introduced which will force creditors to be bound by the rescue plan, subject to approval by a court as being fair and equitable.
A court will need to be satisfied that those dissenting creditors will be no worse off than they would have been if the company had entered an alternative insolvency procedure.
4. Statutory Demands
Temporary provisions are being introduced to void statutory demands made between 1 March 2020 and 30 June 2020. Winding up petitions will be restricted from 27 April 2020 to 30 June 2020 and will be reviewed by a court in order to verify that the company in question is unable to pay as a result of the pandemic.
5. Suspension of Wrongful Trading
Directors will not face the threat of personal liability for wrongful trading under section 214 of the Insolvency Act 1986, whilst they make their best efforts to continue to trade. This measure will be applied retrospectively for any trading between 1 March 2020 and 30 June 2020.
Directors will be able to focus on trading through the period without liability should the company subsequently become insolvent. Deterioration of a company’s financial position outside the above dates will remain a factor in determining the liability of directors under the current legislation.
6. Financial Services
Due to the powers held by financial services regulators, the company moratorium will not be available to certain financial services firms. The suspension of wrongful trading between 1 March 2020 and 30 June 2020 will also not apply to certain financial services firms.
Such firms will have access to the new restructuring plan, although financial services regulators will continue to play a role in applying safeguards.
The new termination clauses measures will not apply to financial contracts or financial services firms.
The CIGB proposes the most extensive changes to insolvency law in many years. It is both a partial response to a long-term call for reform and an emergency initiative to assist in providing a life-line to companies which are suffering during the current crisis.
It also represents continuing attempts to balance creditors’ rights against the need to support businesses during the lockdown.
Mr. Mark joined SBP Law in January 2019. He has over 13 years’ experience of insolvency-related investigations and litigation. He was formerly an examiner at the Insolvency Service and then worked for a further 8 years at a large regional firm acting on behalf of the Secretary of State with regard to directors disqualification investigations.
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