Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 which received Royal Assent on 25 June 2020 contains far-reaching permanent reforms of UK insolvency law as well as temporary measures introduced as a result of the Covid-19 pandemic.

Reforms

Restructuring Plan

The Act introduces a new Restructuring Plan similar to schemes of arrangement but with important additional features .

The Plan is in essence a compromise agreement between a company and its creditors which requires to be voted by 75% by value of each class of creditors and court sanction but with the major change that it is within the discretion of the court to approve the plan and a “cross class cram down” even if there are classes of creditors who have not voted in favour

Moratorium

A new standalone moratorium is introduced whereby a company in financial distress as a result of which it is unable to pay its debts as they fall due can by filing documents at court obtain a moratorium against creditor action which is similar to the moratorium currently available in administration. A key document which must be filed is a statement from an insolvency practitioner known as the monitor that the moratorium is likely to result in the rescue of the company as a going concern

The moratorium is a debtor in possession procedure. It initially lasts for 20 business days but can be extended for a further 20 business days and then for a period up to a year with consent of creditors or approval from the court

Protection of Supplies

The Act prohibits suppliers from enforcing contractual provisions which entitle them to terminate contracts, change contract terms or demand ransom payments triggered by an insolvency event once a company enters an insolvency process which includes administration, liquidation and CVA’s as well as the new restructuring plan and moratorium. This broadly extends the current ban on such provisions being enforced in relation to essential supplies such as utilities to all contracts for the supply of goods and services

Temporary Measures

Wrongful Trading

The provisions of the Insolvency Act which impose personal liability on directors for wrongful trading are suspended for the period from 1 March until 30 September 2020

Although this measure has been broadly viewed as an appropriate response to the pandemic it is important for directors to keep in mind that the suspension applies only to wrongful trading and that there are no other changes made to the legal regime which applies to directors’ duties or to the disqualification of directors

Statutory Demands

One of the grounds for a creditor presenting a winding up petition to the court is that the debtor company has been served with a statutory demand for payment of a debt but has failed to pay within the period of 21 days. The Act introduces a prohibition on any winding up petition which is based on a statutory demand served in the period between 1 March and 30 September 2020. There is no prohibition on serving such demands but a winding up petition relying on the demand may not be commenced in the period of suspension. It’s also worth noting that in Scotland creditors winding up petitions are often based on “short form demands” in terms of which the creditor demands payment within a shorter period, usually between 2 and 7 days, and in the event of failure to pay presents a petition on the basis of the ground that there is satisfactory evidence that the company is unable to pay its debts as they fall due. Subject to the restriction on winding up petitions explained below reliance by creditors on such short form demands is not prohibited under the Act

Winding Up Petitions

In the period from 27 April until 30 September 2020 any winding up petition by a creditor can only be granted where it is established that Covid-19 has not had a financial effect on the company or the company would have been insolvent despite the financial effect on it of Covid-19, In practice this is likely to be a difficult hurdle for most creditors likely to lead to few winding up orders in creditors’ petitions during the restricted period. In addition winding up orders which have already been granted in the period from 27 April and the commencement of the Act will be void unless the Covid-19 hurdle can be overcome

Pre-pack Administrations to Connected Parties

In a change introduced as a result of parliamentary debate of the Bill, the Secretary of State has been given power to make regulations in relation to pre pack administrations under which the company’s assets are sold to a connected party but only if that power is used before June 2021. The compulsory referral of such transactions to the “Pre-Pack Pool” which had been considered has not however been introduced.

We’re here to help

Please contact our specialist Restructuring & Insolvency and Dispute Resolution teams for advice on restructuring your business and the effect of these changes on insolvency proceedings and debt recovery processes.