COVID-19: Permanent and temporary changes to Corporate Insolvency and Governance laws in the UK

Dentons

The Corporate Insolvency and Governance Act 2020 (the Act) came into force on 26 June 2020, providing the UK (but with separate provisions for Northern Ireland) with temporary and permanent changes to insolvency law aimed at helping businesses manage the economic implications of COVID-19.

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, 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, 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 fact the moratorium is in place). It cannot grant security, dispose of property other than in the ordinary course of business, or indeed pay any pre-moratorium debs over £5,000 (or 1% of the company's total unsecured liabilities, whichever is 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 a subsequent appointment with a company as an administrator.  On 29 September, the government extended certain temporary provisions relating to the moratorium until 30 March 2021:

  • The temporary procedural rules on the operation of the moratorium (to bridge the gap until the general insolvency rules overhauled in 2016 can be amended).
  • The waiver of the requirement that a UK company applying for a moratorium must use a court application if it is already subject to a winding-up petition.
  • The prohibition on entities authorised to hold client money from obtaining a moratorium.
  • The relaxation of the requirement that a company seeking a moratorium has not been in an insolvency procedure or previous moratorium in the last 12 months.

Originally, the requirement that a company seeking a moratorium must prove it is "likely to be rescued as a going concern as a result" had been relaxed where the company's potential failure was due to the COVID-19 pandemic and this relaxation was also going to be extended until 30 March 2021.  However, legislation coming into force on 1 October 2020 has now overturned the extension of the relaxation, so this will come to an end in a few days' time.  Companies that are already subject to a moratorium before 1 October 2020, or that have made a court application for a moratorium before that date, will continue to be able to rely on the relaxation.

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 does not 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 officeholder 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 most recently extended to apply until 30 March 2021).

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; and
  • 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, no creditor with moratorium debt or excluded pre-moratorium debt may 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

As a result of the continued pandemic crisis, certain temporary provisions have been extended by the government from their initial expiry date of 30 September 2020.  Others have not:

  • Restrictions on winding-up petitions – these will now be void if (a) presented on the basis of any statutory demand made between 1 March 2020 and 31 December 2020, or (b) otherwise presented to the court between 27 April 2020 and 31 December 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 – these provisions have not been extended past the original expiry date of 30 September 2020.  Whilst not a blanket defence 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 was, up until 30 September 2020, entitled 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 occurred during the period between 1 March 2020 and 30 September 2020 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 did not apply to certain financial services firms also excluded from the new moratorium provisions.  The apparent lack of reliance on these temporary provisions by directors and their advisers has led the government to abandon these provisions for now.

Please contact a member of the team for more information.

Information contained in our COVID-19 articles and publications is 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 in navigating our clients to manage the crisis as it encompasses, inter alia, information about procedural changes, directors’ duties and third party enforcement rights comparisons. The Tracker also includes links to the more in-depth analysis produced by the global Dentons RIB network in more than 40 countries, with more to come. The England and Wales section of the Tracker has been updated to reflect latest intelligence on the Act.

Click here to access the Global COVID-19 Insolvency Tracker.

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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