Corporate Insolvency and Governance Act 2020 comes into force (Updated on June 29, 2020)

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On 26 June, the long-awaited Corporate Insolvency and Governance Act 2020 became law providing the UK and Northern Ireland with temporary and permanent changes to insolvency law aimed at helping businesses manage the economic implications of COVID-19 including:

Permanent measures

Company moratorium – a breathing space against creditor action, initially for 20 business days but extendable, and proposed by directors of a company who will remain in control but overseen by a monitor who will be an officer of the court and a licensed insolvency practitioner. The moratorium will give companies a "payment holiday" for pre-moratorium debts that have fallen due either before or during the moratorium period unless the debts fall within an exclusion.

Certain key payments are in fact excluded from this payment holiday during the moratorium. Payments for goods or services, wages, the monitor's remuneration ,redundancy payments and rent during the moratorium, and importantly debts or other liabilities arising under "a contract or instrument for financial services" will still need to be paid as well as those debts incurred during the moratorium are paid unless a CVA, scheme or restructuring plan is already under way.

The moratorium imposes restrictions on what the company and its directors may do (unless they obtain the monitor's or the court's consent), and limit what enforcement actions creditors may take during this time along the lines of the existing administration moratorium. The company cannot obtain any credit over £500 (without disclosing the act the moratorium is in place. It can't grant security, dispose of property other than in the ordinary course of business or indeed pay any pre-moratorium debs over £5000 (or 1% of the company's total unsecured liabilities – whichever greater), without the consent of the monitor or the court. Hire- purchased property and property subject to a security interest may be disposed of during the moratorium, but only with the court's permission.

Generally started by a simple filing, unless insolvency proceedings are already under way (or the company is registered overseas), in which case a court order will be required and granted on the basis that having the benefit of a moratorium is likely to produce a better result for the creditors as a whole than a winding-up. Critically, the monitor must confirm that, in its view, the moratorium is likely to result in the rescue of the company as a going concern. This parallels the primary (yet least frequently achieved) purpose of administration. However, it does not, for example, cover the most commonly used restructuring mechanism for saving businesses and jobs i.e. a sale of business and assets in a pre-pack or otherwise. This should encourage companies and monitors to consider the new alternative of a restructuring plan as a means of rescuing companies as a going concern (see below). For these purposes, temporarily, the monitor is to disregard any worsening of the financial position of the company for reasons relating to COVID-19. However, if an administration does become necessary the monitor may accept subsequent appointment with a company as an administrator.

Suspension of termination clauses for suppliers of goods and services – this prevents suppliers of a company in an insolvency procedure or under the protection of the company moratorium from relying on contractual terms to stop supply, terminate or vary contract terms/increase prices provided they are paid, whilst causing them no financial hardship.

Any term in a contract that allows a supplier of goods or services to terminate on a company's entry into an insolvency process will be invalid. It doesn’t matter whether that provision operates automatically or requires an election to be made or notice given by the other party. Nor can the supplier demand payment of outstanding pre-insolvency charges as a condition of continuing supply.

If the supplier was already entitled to terminate the contract or supply before the company went into an insolvency process, the Act prevents the supplier exercising that right once the company is in the insolvency process.

All this applies, unless the company or an insolvency office holder agrees otherwise or the court finds (on the supplier's application) that continuation of the contract would cause the supplier "hardship" (with a temporary exemption to exclude small businesses during the pandemic).

Restructuring plan – a brand new insolvency process aimed at company rescue. Similar to a scheme of arrangement and requiring court sanction, it will enable more debts to be restructured and will support the injection of new rescue finance. Crucially, it will allow dissenting classes of creditors to be bound, provided they are no worse off than in a more traditional insolvency procedure. Financial services firms will have access to the plan with additional safeguards. The plan will require approval by 75% in value of the company's affected creditors by class.

If one class does not achieve the 75% threshold, - a dissenting class - the court can still sanction the scheme and bind all creditors (including dissenting creditors) to it if the plan meets two conditions.

  • That none of the dissenting class would be worse off under the plan than under the "relevant alternative". The relevant alternative is whatever the court considers (on evidence) would most likely occur to the company if the plan were not sanctioned.
  • That a class of creditors representing 75% in value who will receive payment under the plan or who have a genuine economic interest in the relevant alternative – have voted in favour of the plan.

Where a plan is proposed within 12 weeks of any new style moratorium ending, any creditor with moratorium debt or excluded pre-moratorium debt may not participate in meetings (though they will receive the statement) and the court will not sanction the plan if that creditor has not agreed to it.

Temporary measures

  • Restrictions on winding-up petitions – these will be void if presented a) on the basis of any statutory demand made between 1 March 2020 and 30 September 2020, or b) otherwise presented to the court between 27 April 2020 and 30 September 2020 unless the petitioner can prove the coronavirus has not had a financial effect on the company, or the facts by reference to which the relevant ground applies for winding up the company (other than the expiry of a statutory demand) would have arisen, even if coronavirus had not had a financial effect on the company.
  • Relaxation of liability for wrongful trading – whilst not a blanket defense to directors' liability (general directors' duties to act in the best interests of the company (or, on insolvency, its creditors), fraudulent trading and other liabilities will continue to apply), the court is to assume, for the purposes of any wrongful trading claim against a director, that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the expressed period (aimed at covering COVID-19 lockdown) and, therefore, not liable to contribute to the losses incurred by the company in this period (though still liable for those before or after). This will not apply to certain financial services firms also excluded from the new moratorium provisions.

Information contained in our COVID-19 articles and publications are correct at the time of print. This is however a constantly evolving situation across the globe and specific advice and guidance should be sought as required.


Global COVID-19 Insolvency Tracker

The current situation is challenging for all of us but for some companies, it becomes even harder. Our dynamic and innovative Global COVID-19 Insolvency Tracker can help navigating our clients to manage the crisis as it encompasses inter alia information about procedural changes, directors’ duties & third party enforcement rights comparisons. The tracker also includes links to the more in depth analysis produced by the global Dentons RIB network in over 40 countries, with more to come. The England and Wales section of the tracker has been updated to reflect latest intelligence on the Bill.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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