Corporate Insolvency and Governance Bill 2020 offers support to businesses through coronavirus

Many businesses are continuing to struggle financially due to the restrictions in place following the coronavirus pandemic and, even though those restrictions are beginning to ease and in spite of the range of Government support on offer, there are still those facing the distinct possibility of restructure or liquidation.  It is for this reason the Government has made proposals to change or suspend the insolvency rules to assist those businesses further and secure their survival beyond he pandemic.  Torion Bowles, Partner in our Commercial Litigation and Dispute Resolution team, reviews the new proposals and how they will support businesses through the coming weeks and months.

On 20 May 2020, the Corporate Insolvency and Governance Bill (“the Bill”) was published with the intention to give those companies who potentially face closure the flexibility and time to consider their options as to whether they could remain viable and trade through the coronavirus pandemic.  Due to the time critical situation for businesses the Bill is expected to progress by way of the accelerated parliamentary process.

Temporary suspension of wrongful trading provisions

Under the Companies Act 2006 (“the Act”), Directors are subject to numerous duties and in particular are required to exercise reasonable care, skill and due diligence, which includes ensuring that the company does not trade while insolvent.  This will arise where a company is unable to pay its debts as they fall due, or in situations where liabilities are greater than assets, and Directors are under a duty to minimise potential losses to creditors.  If no action is taken when a Director is aware that the company is likely to become insolvent or is insolvent, that Director may be wrongfully trading, which carries unlimited personal liability. 

The proposals offer a temporary three-month suspension of wrongful trading provisions, meaning company Directors could continue to trade and pay staff without the threat of personal liability with retrospective effect from at least 1 March 2020 to 30 June 2020, or one month after the Bill becomes law.  This is under the assumption that the Director is ‘not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period’.  The suspension only applies to eligible companies, excluding certain financial companies, such as insurance companies and banks, and public-private partnership project companies.

It must be made clear that other Directors duties remain unchanged, that this suspension is only temporary and a Director will still be liable for any other breach of duty under the Act.  It is for this reason that Directors must continue to monitor their financial position and make decisions that will minimise losses to their creditors should they become insolvent.    

Permanent change to moratorium

The new moratorium regime is a permanent change under the Bill and suspends the steps a creditor can take in chasing debt through the Courts, allowing the company some breathing space to either restructure or seek new investment.  A “monitor”, who would be a qualified Insolvency Practitioner, must be appointed in order to assess the viability of rescuing the company from insolvency, and will have significant control in choosing which debts will be paid should they become insolvent.

In order to obtain the moratorium, the Directors must make an application to the Court (with the support of the Monitor) stating that they consider the company is, or is likely to be, unable to pay its debts, with a similar statement from the monitor stating their eligibility to be acting as the monitor and their suggestion that a moratorium could help keep the company from becoming insolvent.

Once granted, the moratorium would last for 20 business days initially, which can be extended for a further 20 business days without creditor consent. 

Change to restructuring plans

The Restructuring Plan forms a part of the Bill and will exist alongside the current provisions such as Company Voluntary Arrangements (CVAs) and the Scheme of Arrangement.  

Under the Restructuring Plan, all classes of creditors need to approve the Restructuring Plan (a class of creditor will be deemed to have passed the Restructuring Plan proposal if 75% of the creditors of the class vote for the proposal). If creditor class (and/or shareholders) do not approve the Restructuring Plan an application can be made to the Court to force the dissenting creditors to accept the Restructuring Plan where the Court considers the Restructuring Plan to be fair and equitable and in the interests of the creditors.  The intention of the Government is to avoid creditors who have no genuine economic interest (i.e. those who would receive nothing if the company was to enter an insolvency procedure) from being able to frustrate a restructuring that may secure the company’s future, providing those creditors are no worse off than they otherwise would be in the next most likely outcome.

In addition to these provisions, the Bill also includes:

• Temporary restrictions on winding up petitions and statutory demands where the debt in question solely relates to the coronavirus emergency and the company’s inability to pay its debts has only come about due to the pandemic. The proposal is likely be a welcome relief to those in the hospitality and retail sectors particularly. 
• Prohibiting termination clauses in supply contracts, preventing most suppliers from ceasing their supply or from demanding additional payments while a company undergoes a rescue process.
• Allowance of Annual General Meetings to be held more flexibly in line with Government guidance, for example using virtual methods or by phone with only proxy voting.
• Extensions to Companies House filing requirements.

It is encouraging to see the Government taking proactive steps to address the serious issues faced by companies. While this offers a lifeline to businesses who are struggling, creditors may consider this a blow.  However, it must be remembered that these measures have been introduced to ensure the survival of businesses, and so creditors should consider the fact that, if successful, they will have a business to continue trading with should they indeed survive.

To have your questions answered about any new provisions made in the Bill, or if you are a struggling business or creditor with questions regarding your debt, you can contact Torion or a member of the Commercial Litigation team on 023 8071 7445 or email torionbowles@warnergoodman.co.uk.  While we are not taking face to face appointments, we are currently working remotely in line with Government guidance and can discuss your situation with you in a manner convenient for you and your business.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.