Restructuring and Insolvency partner Mark Cullingford revisits the Government’s corporate insolvency measures – originally introduced in June and updated on 25 September – which aim to provide to support businesses dealing with the impact of the COVID-19 pandemic.
The Corporate Insolvency and Governance Act 2020 that was announced in April 2020 became law after its progress was accelerated through the House of Commons and House of Lords on 25 June 2020. Many of its temporary provisions extended until 30 September 2020. However, this ‘end date’ has now been changed by ‘extension regulations’ made on 24 September 2020.
Key provisions of the act have been amended by these regulations. To recap:
- Winding-up petition
– Temporary changes to company winding-up provisions were introduced in June 2020. They limit the ability to advance a winding-up petition against companies that have been financially affected by COVID. These were set to continue until 30 September 2020 but have now been extended to 31 December 2020 (or later if extended);
– These mean that a statutory demand served between 1 March 2020 and 31 December 2020 cannot be relied on as evidence of insolvency. A petitioner must provide evidence that the creditor has ‘reasonable grounds for believing’ the debtor would be deemed insolvent even if COVID hadn’t had a financial effect on it and satisfy the judge of this at a preliminary process;
– The dispensation for the need to validate transactions by companies that have a pending winding-up petition has not been changed and will apply in this extended period;
– Some retrospective changes to some past and (potentially) continuing winding-up petitions and orders where petitions have been issued or winding-up orders made since 27 April 2020 were made by the act.
- Continuity of supply – invalidation of termination for insolvent
– New provisions were introduced in June 2020 that apply to companies entering insolvency proceedings. These prevent suppliers from terminating supply contracts or requiring payment of arrears before they continue to supply the company after the commencement of insolvency proceedings;
– This should better enable those companies to continue trading and seek to rescue the company or the business;
– To relieve the hardship on suppliers there was a temporary dispensation for small businesses that meant they could terminate supplies. That had been limited to 30 September 2020 but has been extended to 30 March 2021.
- Access to the new moratorium
– A new moratorium procedure to protect businesses that are insolvent or may become insolvent from creditor action was introduced in June. This required a licensed insolvency practitioner (as ‘monitor’ of the moratorium) to consider whether the company can be rescued if protected by the moratorium;
– The new legislation included measures that made entry into the process simpler for a temporary period until 30 September 2020 (e.g. where the company had received a winding-up petition). That period has now been extended to 31 March 2021;
– Further changes are expected shortly and are expected to be more targeted to viable businesses that can seek a rescue;
– By this process the directors will remain in control of the management of the company and seek to advance that rescue strategy under such a procedure.
- New restructuring plan
– This new procedure was also introduced in June to supplement the existing scheme of arrangements process;
– There are no timing changes for this process.
- Wrongful trading
– The much-heralded changes to ‘wrongful trading’ provisions introduced in June 2020 (with partial retrospective effect) was intended to limit directors’ potential liability to contribute to the assets of a company where they have permitted a company to continue to trade after formal insolvency was, essentially, inevitable;
– That dispensation applied for a temporary period and requires the courts to assume the directors were not responsible for any worsening of the company’s position between 1 March 2020 and 30 September 2020. That period has not been extended;
– There have always been concerns that wrongful trading was just one of the complex issues facing directors when a business is distressed and ‘breach of duty’ as often a greater risk.
These changes affect business and not individuals which were unaffected by the reforms and new procedures established in June 2020. They also follow on from other extensions that limited the exercise of landlords’ rights including:
- the temporary prohibition on the exercise of rights to forfeit leases for non-payment of rent until 30 September 2020 was extended to 31 December 2020;
- the requirements for there to be 189 days of arrears of rent before a commercial landlord could exercise Commercial Rent Arrears Recovery (CRAR) which was due to expire in 30 September 2020 was also extended to 31 December 2020.
Many businesses are now facing further concerns as they re-adjust to further restrictions and added costs. The level of support has changed and is reducing. We can expect there to be a more targeted approach to any ongoing support but also less of a general safety mat for directors to look to.
There are already mounting concerns about issues around assertions about the possible misuse – accidental or not – of some of the schemes and issues will arise from directors’ conduct in any distressed scenario.
Whether you are a director, secured or unsecured creditor, supplier, shareholder or guarantor of a business that may be facing or may face financial strain, this new legislation will affect your options. Thrings continues to work with clients to enable them to face changes to their business that arise and, where necessary, adapt their plans to reflect this new legislation.
If you are seeking advice or would like to discuss any of the points raised in this article, please contact Mark Cullingford or Melissa George in Thrings’ Restructuring and Insolvency team.
Note: Nothing in this article constitutes legal advice and we are not liable for any reliance on the information provided. This is a rapidly changing subject, and whilst correct at the time of writing, circumstances may have changed since publication.
