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Coronavirus (COVID-19): Corporate Insolvency and Governance Bill – what does it mean for businesses?

3 June, 2020

The government recently published its Corporate Insolvency and Governance Bill, which will put in place a series of measures aimed at supporting businesses facing challenges resulting from coronavirus.

The government recently published its Corporate Insolvency and Governance Bill, which will put in place a series of measures aimed at supporting businesses facing challenges resulting from coronavirus.

The Bill consists of six insolvency measures and two corporate governance measures. Some of the measures have been in development for years, whilst others have been designed specifically to tackle the coronavirus crisis.

The Bill will now make its way through Parliament before coming into force.  Company & Commercial Partner, Paul Longland, and Trainee Solicitor Zaeem Mughal look at the latest on the Corporate Insolvency and Governance Bill and the commercial issues businesses should be considering.

Company Moratorium

The first measure introduced by the Bill is a free-standing company moratorium. This measure will give eligible businesses a 20-business day opportunity to restructure or seek new investment. During this period, no legal action can be taken against a company without leave of the court.

Directors will be able to extend the initial 20-business day moratorium to 40-business days. Any extension beyond 40-business days will require the consent of the creditors or the court. The company will remain under the control of its directors during the moratorium, but the process will be overseen by a monitor who will be a licensed insolvency practitioner.

The directors can obtain a moratorium by filing a statement at court that the company is, or is likely to become, unable to pay its debts. The monitor must also make a statement that they are qualified to act as monitor, the company is eligible and that it is likely that a moratorium would result in the rescue of the company as a going concern.

Restructuring

The Bill also introduces a new restructuring plan, which will allow struggling companies, or their creditors or members, to propose a new restructuring plan. This will enable complex debt arrangements to be restructured and will support the injection of new rescue finance.

The plan will require creditors to vote in separate classes. Each class will be deemed to have approved the plan if 75% by value of that class vote in favour. The court will grant final approval to the plan.

The new restructuring plan will introduce a cross-class cramdown. This means that one or more dissenting classes (i.e. a class which does not meet the 75% value threshold) can still be bound to the plan. This means that the court can still approve a plan even if one or more classes do not vote in favour.

Termination Clauses

Supply contracts often provide the supplier with the right to stop supplying a company that has entered into an insolvency or a restructuring procedure.

Under the Bill, where a company has entered into an insolvency or a restructuring procedure, the company’s suppliers will not be able to stop supplying the company or vary the contract terms. The company is still required to pay for the supplies made once it is in the process of insolvency or restructuring.

Suppliers can be relieved of the obligation to supply if it causes hardship to their business. There is also a temporary exception for small company suppliers during the current crisis.

Wrongful Trading

The wrongful trading provisions in the insolvency Act 1986 imposes a personal liability on directors of insolvent companies that continue to trade when there is no reasonable prospect of the company avoiding insolvency.

The Bill will temporarily remove the threat of personal liability for wrongful trading from 1 March 2020 to 30 June 2020. Liquidators and administrators will be unable to bring claims for wrongful trading against an insolvent company’s directors for any losses caused by trading during the period of the suspension of the rules.

This means directors can use their best endeavours to trade during the coronavirus period without the threat of personal liability for wrongful trading.

Statutory Demands and Winding-up Petitions

This Bill introduces temporary provisions to restrict statutory demands and winding up petitions against companies if the inability to pay their debts is the result of Coronavirus.

No petition for the winding up of a company can be presented on or after 27 April 2020 on the ground that the company has failed to satisfy a statutory demand if the relevant statutory demand was served during the period beginning with 1 March 2020 and ending with 30 June 2020 or one month after the coming into force of the Bill, whichever is later.

Likewise, no petition for the winding up of a company can be presented by a creditor on or after 27 April 2020 until 30 June 2020 or one month after the coming into force of this Bill, whichever is later, unless the creditor has reasonable grounds for believing that:

a) coronavirus has not had a financial effect on the debtor, or

b) the debtor would have been unable to pay its debts even if coronavirus had not had a financial effect on the debtor.

Annual General Meetings (AGM) and General Meetings (GM)

The Bill temporarily allows companies to hold an AGM or GM by other means even if the company’s constitution would not normally allow it. This is so companies can adhere to social distancing rules.

Company House Filings

Failure to file certain information with Companies House by the relevant deadline can result in the company paying a late filing penalty or the directors being prosecuted. The Bill enables the Secretary of State to make regulations to extend deadlines.

Any extension period for the filing must not exceed:

  • 42 days, in a case where the existing filing period is 21 days or fewer, and
  • 12 months, in a case where the existing filing period is 3, 6 or 9 months.

When does the Bill come into force?

As mentioned above, the Bill will now proceed through Parliament with an aim of receiving royal assent as soon as possible. It is anticipated that this will be in June 2020. We will provide further updates as and when developments occur.

*The information set out in this article is correct at the date of publication (03 June, 2020). The effect of coronavirus on businesses is a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected. Visit our Coronavirus (COVID-19) Hub for more Leading Insights.

Contact us

If you have any questions regarding the impact of coronavirus on corporate structures or are seeking up-to-date legal advice, contact Paul Longland on 01202 294566 or email PaulLongland@steeleraymond.co.uk.

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