The Corporate Insolvency and Governance Act 2020 (CIGA or the Act) came into force on 26 January 2020 with the aim of providing an expanded array of tools to help rescue struggling companies and thereby to help businesses survive the crisis caused by the COVID-19 pandemic. The Act signifies the biggest reform to the UK’s insolvency framework for many years.
Although the key focus of CIGA is to help companies struggling as a result of the COVID-19 pandemic, it also contains more permanent provisions that had been the subject of earlier consultation and proposals. Consequently, the Act addresses both these lasting reforms and the temporary measures that it is hoped will help companies hit hardest by the current pandemic.
COVID-19 key temporary measures
The temporary measures now in place to prevent aggressive creditor action and so to protect companies that would be viable were it not for the COVID-19 pandemic are set out below.
“The relevant period” in all cases is defined as 1 March 2020 to 30 September 2020, extendable in six-month increments. The Act has a degree of inbuilt flex however as the period to which these temporary measures apply may be changed. There is also provision for further regulation up to 30 April 2021 if additional protective measures are needed because of the effects of the pandemic on business and the wider economy.
Wrongful trading. Personal liability for wrongful trading is now limited by the non-rebuttable presumption that any worsening of the company’s financial position or net shortfall to creditors incurred during the relevant period is not the responsibility of the directors. However, directors may still be liable to contribute to losses incurred before and after the relevant period during a period of wrongful trading if it can be proved that they were trading fraudulently or in breach of other director duties.
Winding up petitions. Any winding up petition presented between 27 April 2020 and 30 June 2020 based on a statutory demand made during the relevant period will now be prohibited. In addition, presentation of a winding up petition will be restricted during the relevant period except if the COVID-19 pandemic has had no effect on the financial position of the company.
AGMs and general meetings. Companies under a duty to hold a general meeting will be able to do so “by any other means”. This translates as remote meetings, whether or not permitted by the company’s constitution. This provision is to apply from 26 March 2020 to retrospectively validate any company that has already held meetings in this way and will continue until 30 September 2020 unless extended. Shareholders will not be prevented from exercising their right to vote on resolutions. Voting may simply be done virtually if need be.
Extensions for filing. The Secretary of State is empowered to make regulations extending the time for filing certain documents with the Registrar of Companies such as accounts, confirmation statements and the registration of charges.
Temporary exclusions. Even a company subject to a winding up petition will be eligible for the moratorium by simply filing the relevant documents at court, rather than by applying to the court. A modified statement from the monitor (see below) will be required. There is also a temporary exclusion of small suppliers from the protection of supply provisions in CIGA (again, see below).
Permanent reforms
CIGA makes three major permanent reforms to the existing corporate insolvency framework that may be used for companies facing difficulties:
- A new moratorium. This will stop creditors from applying for administration orders or petitioning for the winding up of the company while the company seeks a rescue or restructure.
- Restructuring plan. Companies will be able to enter into a restructuring plan that will bind creditors and allow for the restructuring of debt while new rescue finance is sought.
- Protection of supplies. Companies’ supplies will be protected during an insolvency process or restructuring.
Moratorium
How to obtain a moratorium. Financially distressed incorporated entities that would otherwise be viable are now easily able to enter a new ‘Part A1’ moratorium by filing a notice with the court. Of all the permanent reforms, this is likely to be of most immediate interest to companies to give them the benefit of some breathing space and enable them to seek to be rescued as a going concern.
Note that if there is an outstanding winding up petition against the company, the directors will have to apply to court rather than just filing the notice.
How long does the moratorium last? The moratorium will last for an initial period of 20 business days beginning with the business day after the day on which the moratorium comes into force and may, subject to certain conditions, be extended once for a further 20 business days without creditor consent. If the company obtains the consent of the pre-moratorium creditors, an extension can be sought for a period up to one year from commencement. The court also has the power, on an application by the directors, to extend the moratorium to a date set in its discretion. Where a company voluntary arrangement (CVA) is proposed, the moratorium will not end until the proposal is disposed of. But if the company enters a restructuring plan, the moratorium will be brought to an end.
What effect does the moratorium have? The effects are various:
- The company is entitled to a payment holiday in relation to pre-moratorium debts although some liabilities that fall due during the moratorium will still need to be discharged.
- Other than for very limited circumstances, no insolvency proceedings may be commenced against the company. Only the directors can place the company into insolvency.
- Floating charges are prevented from crystallising.
- No steps may be taken to enforce security over company property except with the leave of the court.
- It is not possible to commence or continue proceedings against the company (other than in the employment tribunal) without the court’s permission and even then, in limited circumstances.
- Certain restrictions on the company’s activities will apply during the moratorium.
What is the role of the ‘monitor’? An insolvency practitioner appointed as monitor will oversee the moratorium in order to seek to establish if the company will be rescued as a going concern whilst under the control of the directors. The monitor may be challenged on the basis that its action or inaction has unfairly harmed the applicant or the interests of creditors or members.
Offences. Note that an officer of the company will commit an offence if fraud or false representation is used to obtain a moratorium or an extension.
Priority of moratorium debts. Debts incurred during the moratorium enjoy a ‘super’ priority in a subsequent administration or liquidation. Moratorium debts will rank above all other claims and expenses, other than fixed charges, when a company enters administration within 12 weeks of a moratorium ending. When a petition to wind up the company is presented within 12 weeks of a moratorium ending, moratorium debts must be paid in preference to all other claims. Notably, the Act does not attempt expressly to prevent financial creditors from accelerating their debt during the moratorium however such debt will be excluded from the priority status given to priority pre-moratorium debt.
Restructuring plan
Companies may now opt to seek a rescue by proposing to restructure debt and inject fresh rescue finance. This option requires 75% of creditors by value (or class of creditors) to vote in favour and the court retains a power to bind dissenting creditors across classes.
Prohibition on suppliers of goods and services
Suppliers of goods and services will now be unable to enforce termination clauses in contracts if the company has entered an insolvency process or subject to the new moratorium or if the court has summoned a meeting in respect of a restructuring plan. But it is possible for suppliers to apply to the court to for relief in cases of extreme hardship. Once the company is in the insolvency process, it will have to pay creditors for new supplies but the company will be relieved from paying outstanding amounts due for past supplies while it seeks a rescue. During the COVID-19 pandemic, there is a temporary suspension of this provision available for small suppliers; certain financial services are exempt on a permanent basis.
If you have any queries please contact Elliot Shear at elliot.shear@wlegal.co.uk or James Orloff at james.orloff@wlegal.co.uk
