Coronavirus: Changes to insolvency law
New measures introduced by the Corporate Insolvency and Governance Act
The Corporate Insolvency and Governance Act 2020 (the “Act”), announced on 26 June 2020, made permanent changes to insolvency law in Northern Ireland and to company law, which applies on a UK wide basis. It also includes a number of temporary modifications to insolvency and company legislation to assist companies during the Coronavirus pandemic.
The permanent insolvency measures contained in the Act had already been proposed, however, their early introduction was considered to be beneficial to assist companies through the pandemic. The permanent changes orientate the UK’s insolvency legislation more toward rescue and are similar to the Chapter 11 approach in the USA.
Permanent Insolvency Measures
It introduced a free-standing moratorium to give UK companies a “breathing space” in which to pursue a rescue or restructuring plan. During this moratorium, no creditor action can be taken against the company without the court’s permission. The moratorium is overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company remains with the directors (a “debtor-in-possession” procedure).
There is a restructuring plan to help viable companies struggling with debt obligations. Courts can sanction a restructuring plan (that binds creditors) if it is “fair and equitable”. Creditors vote on the plan, but the court can impose it on dissenting creditors (known as “cross-class cram down”).
There is a prohibition on termination (or “ipso facto”) clauses that can apply when a company enters an insolvency procedure, a moratorium or begins a restructuring plan. The Act prevents suppliers from stopping their supply while a company is going through a rescue process to maximise its chances of success.
The Act includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business (small suppliers were exempt from the obligation to supply until 30 June 2021 so that they could protect their business if necessary).
Temporary Insolvency Measures
The temporary insolvency measures in the Act aimed to support businesses during the pandemic, help them to avoid insolvency and keep trading. The measures were originally projected to end in September 2020, however the legislation contained provisions to allow them to be extended by up to six months at a time if it was considered necessary to do so. These measures are:
Entry requirements to the new moratorium
Temporary modifications to the new (and otherwise permanent) moratorium procedure were made to relax the entry requirements during the pandemic. A company could enter a moratorium even if it was subject to an insolvency procedure in the previous 12 months; measures also eased access for companies subject to a winding up petition. The temporary moratorium rules were extended and expire on 30 September 2021.
Suspension of serving statutory demands
Statutory demands will be void if served on a company during the “relevant period” (between 1 March 2020 and 30 September 2021).
Restrictions on winding-up petitions where unpaid debt is due to Covid-19
Winding-up petitions presented during the “relevant period” on the basis that a company is unable to pay its debts will be scrutinised by the court to determine the cause of non-payment. Where the unpaid debt is due to Covid-19, no winding up order will be made.
These restrictions also expire on 30 September 2021, but transitional rules have been enacted from 1 October 2021 until 31 March 2022. These modified rules aim to promote a gradual return to the normal regime. During this period, winding-up petitions can only be presented:
- in respect of debts of over £10,000;
- if the debtor has been given 21 days to respond with a proposal for repayment of the debt; and
- (for commercial rents only) if the debt isn’t related to coronavirus.
Suspension of the wrongful trading rules
The Act temporarily removed the threat of personal liability for wrongful trading from directors. The measure initially expired on 30 September 2020 but was then revived from 26 November 2020 to 30 June 2021.
Temporary Corporate Governance Measures
The Act’s temporary corporate governance measures sought to relieve the burden on businesses to allow them to focus their efforts on continuing to trade.
Holding of statutory meetings
Specifically, it temporarily gave companies (and other bodies) greater flexibility to hold Annual General Meetings (AGMs) and other meetings in a safe and practicable manner in response to the pandemic (e.g. virtual meetings). This measure applied retrospectively from 26 March 2020 to 30 March 2021. During this period directors were not exposed to liability for failing to hold an AGM in accordance with a company’s constitution.
Filings at Companies House
It temporarily extended filing deadlines at Companies House. The Act provided for a temporary extension to the period allowed for the directors of a public company to comply with their obligation under section 441 of the Companies Act 2006 to deliver accounts and reports for a financial year to the Registrar at Companies House. The measure applied retrospectively from 26 March 2020 and expired on 5 April 2021.
First published 29 June 2020