What the Corporate Insolvency & Governance Act 2020 Means For Company Directors
During the midst of the panic in early summer 2020, the government made the most significant change to the existing Insolvency laws that have been seen for decades. The UK Corporate Insolvency and Governance Act 2020 had a rapid passage through parliament to becoming law in just over 5 weeks.
Usually, such changes to existing legislation can take up to a year. But, at its heart, the premise of the Act is to allow businesses in financial difficulties due to the pandemic extra time to produce plans and procedures that will aid the business to continue as a viable and sustainable organisation. It also allows company directors a degree of extra protection from their creditors.
The Act is a complex document, but we’ve summarised the more salient points for business owners who want a snapshot of what to expect.
OVERVIEW
The Act comprises three permanent and three temporary measures.
The permanent measures are:
- A Company Moratorium which focuses on the recovery of a business rather than the realisation of its assets.
- A Restructuring Plan that allows struggling businesses, their members and/or creditors the opportunity to devise and propose a new restructuring plan.
- Restrictions on Termination Clauses which allow a permanent change to the use of termination clauses in supply contracts.
The temporary measures comprise:
- Winding Up Petitions and Statutory Demands which restricts creditors from issuing winding-up petitions and statutory demands until 31st December 2020.
- Wrongful Trading which means a temporary suspension of wrongful trading rules, removing one potential threat of personal liability on directors trading through the coronavirus pandemic.
- Extended Filing of Accounts & Meetings at Companies House comprises extending deadlines for filing End of Year accounts and other corporate documents.
Each of the temporary measures 1 and 3 are in place until 31st December 2020. Measure 2 relating to Wrongful Trading expired on 30 September 2020.
We take a look at each aspect of the act in further detail in the following paragraphs:
COMPANY MORATORIUM
As outlined above, the Moratorium gives businesses that are struggling time to construct a plan to allow companies “breathing space” from creditor action.
Nominally, the initial length of time is 20 days, but this is further extendable by the company directors themselves without further consent, to an additional 20 days, so it is possible to have up to 40 days in total.
In some cases, the period allowed can be up to a year with creditor consent.In real terms, the moratorium means that:
- The rescue plan has to be overseen by a “monitor” who is a licensed Insolvency Practitioner. The monitor must believe that a rescue of the company is achievable. If, however, during the plan the monitor becomes doubtful that the business can be rescued, then the moratorium must end.
- The company must continue to pay certain debts including newly incurred liabilities, payments for new supplies, rent in respect of the moratorium period, certain payments due to employees, and debts under financial contracts, including lending contracts. If those debts are not paid, the moratorium will end. Support from lenders could therefore be required.
However, in this part of the Act, there are a couple of eligibility clauses. Companies need to fulfil two conditions:
- they are incorporated under the Companies Act 2006 or they are unregistered but may be wound up under the Insolvency Act 1986
- the directors state that the company is, or is likely to become, unable to pay its debts AND the monitor believes that the company could be rescued as a going concern with the implementation of the moratorium.
RESTRUCTURING PLAN
The Restructuring Plan is a court-supervised process that is similar to the existing Schemes of Arrangement, but is far more flexible. The main difference is that a struggling business can bind all their creditors by “cramming down” their debts.
The cramdown is “cross-class” in that it will allow dissenting classes of creditors to be included in the plan provided the plan is sanctioned by the court and the court is satisfied that creditors would be no worse off than if the struggling company entered into other insolvency procedures.
WINDING UP PETITIONS
From now to 31 December 2020, a creditor of a struggling business cannot present a winding-up petition, unless it has reasonable grounds to believe that either coronavirus has not had a financial effect on the debtor company, or that the company is unable to pay its debts regardless of the financial effect of coronavirus.
In addition, there is a ban on statutory demands served between 1 March 2020 and 31 December 2020 being used for presenting a winding-up petition on or after 27 April 2020.
The Act eases existing insolvency legislation so that a petition presented during the stated time period will not prevent disposals of the debtor company’s property. As a result of the measure, where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this time, the company’s suppliers will not be able to make major changes to the contractual terms that exist between the debtor and its suppliers.
The customer is required to pay for any supplies made once it is in the insolvency process, but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.
The Act also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the emergency.
STATUTORY DEMANDS
This part of the Act introduces temporary provisions to void statutory demands made between 1 March 2020 and 30 June 2020. These measures are introduced to restrict aggressive creditor action against otherwise viable companies struggling because of COVID-19.
WRONGFUL TRADING
This part of the act looks at the liability of directors and the court must be convinced that the director has not negatively affected the financial position of the company, or those of its creditors, during the period 1st March 2020 to 30th September 2020.
However, losses incurred before and after COVID-19 are still relevant and directors may still liable for breaches of fiduciary duties, misfeasance, during the COVID-19 period.
FILING OF ACCOUNTS AND COMPANY MEETINGS
Extensions to deadlines for filing accounts, and other Companies House filing deadlines, are included both in the Act.
As a result of the restrictions imposed by the government due to the COVID-19 pandemic, the Act includes a number of provisions to make it easier for both public and private companies to hold meetings.
OUR VIEW
At Chamberlain & Co, we realise that trying to interpret what the act means to your company can add to the pressure of trying to maintain a sustainable business during these unprecedented times.
Where this is the case, we are delighted to take time to explain how the Act might benefit you or your business and warmly invite you to contact us for a chat, free of charge. We can outline how the Act might affect your business in real terms and our advice is always given without judgement.
You can speak to us directly at our Leeds HQ on 0113 242 0808, or our regional offices in Sheffield 0114 553 9644 and London 0203 657 0725.
Our you can email us directly at advice@chamberlain-co.co.uk
We look forward to speaking to you.
