The new Corporate Insolvency and Governance Act 2020 came in to force at the end of June. The Act introduces new insolvency provisions into UK law, and was introduced partly as a consequence of Covid-19 issues. However, some of the provisions have been in the pipeline for some time. We summarise below some of the main provisions and the potential implications.
- A new statutory moratorium process is available to companies and LLP’s that are or are likely to become unable to pay their debts but where a moratorium may be likely to result in the company to be rescued as a going concern. This lasts for an initial 20 days but can be extended for a further 20 days or even up to a year with creditor consent or the consent of the court.
This has advantages for the company that is in difficulty in giving more time to try to seek new investment or restructure without creditor action being taken against it. The process needs to be overseen by a monitor – an insolvency practitioner. However, the directors remain in day to day control of the business.
No legal action can be taken against a company that is in moratorium without permission of the court.
- A restructuring plan will enable struggling companies or their creditors or members to propose alternative rescue options. This will resemble the previously existing ‘Scheme of Arrangement.’
However, a new important change will be the provision of a ‘cross-class cramdown’ which allows a company to bind a class of creditors to the plan if the plan is sanctioned by the court as being fair and equitable – even if classes of creditors had voted against it.
- Ipso facto clauses – the Act invalidates agreed contractual termination clauses in contracts for the supply of goods and services where termination is purportedly triggered by the company’s entry into those proceedings.
Many commercial contracts contain provisions that enable a party to take steps under the contract to stop supply or even to terminate the contract if the company with whom they are trading enters into an insolvency process.
This change under the Act overwrites such a contractual provision – unless the business that could take advantage of such a provision is a ‘small entity’, defined as being one where two out of three of the following apply: its turnover is less than £10m per annum; it has less than 50 employees; its balance sheet has less than £5.1m in assets.
If a business is a small entity then it can still apply contractual provisions. If it is not then it has the risk of continuing to trade with an insolvent business for a period of time (while, for example, it is in a moratorium).
The customer will be required to pay for any supplies made once the insolvency process has started but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan. There is scope for a supplier to apply to the court for permission to terminate the contract if it considers that the obligation to continue to supply would cause hardship.
- Winding-up provisions – the Act temporarily removes the threat of winding up and statutory demands presented from 1 march to 30 September 2020 where the unpaid debt is as a result of Covid-19.
Any creditor that wanted to present a winding up order in that period would need to have reasonable grounds for believing that the pandemic had not had an economic impact on the debtor, or that the debtor would have been unable to pay its debts even if Covid-19 had not had an impact.
- Wrongful trading – the Act states that Courts will ignore the period between 1 March 2020 and end of September 2020 when assessing the amount of compensation payable by a director who is later found liable for wrongful trading.
This provision was one of the provisions that was widely publicised in the early days of Covid-19 as being a response to concerns that directors may take steps to place their businesses into an insolvency process at too early a stage if they were concerned about potential personal liability that can arise from a wrongful trading claim.
However, this new provision is unlikely to make much difference to decision making in such circumstances. Other relevant provisions still apply that relate to the duties that a director owes in such circumstances which have not been suspended (such as the duty to act in the interest of creditors instead of shareholders that arises at the point of insolvency). There is also still a risk of directors disqualification proceedings being brought.
Further, the provision only applies where the business failure is due to Covid-19 issues. The extent to which those issues can be unpicked from general trading conditions may provide difficult.
Directors are therefore still well advised to act cautiously and take advice when they think that the point of insolvency has arisen or may be likely to arise.
If you would like any further advice as to how the Act may affect you, please call us on 029 20 34 55 11 or email email@example.com