UK Corporate Insolvency and Governance Bill Update

1st June 2020

Designed to give distressed companies breathing space from creditors, the Corporate Insolvency and Governance Bill 2019-21 was published on 20 May 2020 (“CIGB”) and is being fast tracked. It will introduce into law the following:

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, but where it is considered likely that a moratorium would result in the company being rescued as a going concern. The moratorium aims to provide companies with some breathing space and time to enter into negotiations with creditors, whilst restricting filings for insolvency proceedings and enforcement and legal proceedings and enforcement in respect of any security, during that period.

It will last for an initial period of 20 business days but may be extended with or 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.

A new Restructuring Plan procedure.

This is procedurally similar to a scheme of arrangement, allowing solvent and insolvent companies to propose a plan to creditors. The principal difference from a scheme is that the court can confirm a plan even where a class of creditors has voted against it.

There are pre-conditions to using the Restructuring Plan:

  1. that the company “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern’;
  2. that the compromise or arrangement is proposed between the company and (i) its creditors, or any class of them; or (ii) its members, or any class of them; and
  3. that the purpose of the arrangement or compromise is to “eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties.

The CIGB envisages that a Restructuring Plan (or any of the previously available rescue schemes) may be proposed while the company is subject to a moratorium (see above), however once a court sanctions a Restructuring Plan the moratorium will terminate.

Termination clauses in supply contracts

The CIGB will invalidate contractual termination clauses in contracts for the supply of goods or services where termination is purportedly triggered by the company becoming subject to a moratorium or enters into insolvency proceedings (administration, liquidation or creditors voluntary arrangement), unless the supplier is caused hardship (to be determined by the court) as a result.

However, suppliers of goods or services that are deemed “small entities” and who have supplied to a company that has gone into a formal insolvency process between the date on which CIGB comes into force and 30 June 2020 or one month after the Bill comes into force, whichever is later, can still rely on termination provisions that would otherwise be invalid under the CIGB. There are detailed provisions in the relevant legislation setting out the definition of “small entities”.

Suspension of directors’ liability for wrongful trading.

Courts will ignore the period between 1 March 2020 and the later of 30 June 2020 or one month after CIGB comes into effect (whichever is later) (“relevant period”) when assessing the amount of compensation payable by a director who is found liable for wrongful trading so that it will not take into account any worsening of the company’s financial position during the relevant period.

Temporary prohibition on winding-up petitions.

No winding-up petitions can be presented on the basis of a statutory demand served during the relevant period. Petitions are also not able to be presented during that period on other evidence of an inability to pay debts unless the creditor has reasonable grounds for believing that the coronavirus has not had a financial effect on the company or that the debt issues would have arisen anyway.

Temporary changes to meeting and filing requirements

Between 26 March 2020 and 30 September 2020, certain meeting requirements will be relaxed. For example, a general meeting can, during this period, be held “without any number of those participating in the meeting being together at the same place”.

If you would like more information on the content of this article, please contact Nikki Reid on 07541746433 or by email at nikki.reid@murrellassociates.co.uk. The information provided in this article is a summary for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 26 May 2020. Appropriate legal and financial advice should be sought for specific circumstances before any action is taken.

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