Today is the day for The Corporate Insolvency and Governance Bill 2019
MPs are due to consider all stages of the Bill today (3 June 2020) and assuming there is agreement, its progression through Parliament is expected to be expedited.
The Bill is designed to provide breathing space to UK companies that are facing the threat of insolvency due to trading difficulties caused by the COVID-19 pandemic.
The main objective of the Bill is to provide businesses with the flexibility and breathing space required to enable the continuation of trade whilst complying with their legal obligations in the difficult conditions arising from the COVID-19 pandemic.
I have previously commented on this but summarise below the key areas likely to be of interest.
A new statutory moratorium process
This requires an application to court but is not available where a company has an outstanding Winding Up petition against it.
It is available to companies and LLPs that are, or are likely to become, unable to pay their debts as a result of the current crisis.
The court must be satisfied that the moratorium would achieve a better result for the company’s creditors as a whole than if the company was placed into liquidation following the making of a winding-up order.
The application must be accompanied by a certificate from an insolvency practitioner certifying that, in their view, it is likely that a moratorium would result in the company being rescued as a going concern.
The moratorium will protect the company from proceedings being commenced against it without the permission of the court.
There are a number of restrictions on the company throughout the course of the moratorium which should be considered prior to any application being made.
The moratorium will last for an initial period of 20 business days but may be extended without creditor consent for a further period of 20 business days and with creditor consent or by the court for up to a year or more. The company must publicise the fact that it has the benefit of the moratorium.
The insolvency practitioner is under a duty to monitor the affairs of the company throughout the period of the moratorium to ensure that the result will be the company being rescued as a going concern.
The Bill does not set out the extent of the monitoring requirement and whether the monitor needs to be on site or involved in decision making but the monitor is entitled to rely upon information provided by the company unless the monitor has reason to doubt the accuracy of what is being provided.
Furthermore, the monitor has the ability to apply to the court for directions.
Interestingly, a creditor or any person affected by the moratorium has the ability to challenge the acts or decisions of the monitor by way of a court application. This includes the ability to challenge the remuneration of the monitor.
The company must confirm to the court that the debts arising during the moratorium period have been discharged along with any debts arising prior to the moratorium where a payment holiday has not been agreed. This would suggest that suppliers, employees, landlords, loan repayments, etc will need to be paid during the period of the moratorium and the process cannot be used as a way of continuing to trade but avoiding paying creditors in that time.
Companies required to continue to supply to insolvent businesses
The Bill recognises the fact that the supply of goods and services may need to be protected when a company goes into a formal insolvency procedure. Under the Bill, the new statutory moratorium is included as a formal insolvency procedure.
The Bill provides that any clause in a supply agreement that automatically terminates the supply agreement or would entitle the supplier to terminate the agreement ceases to have effect when the company enters into a formal insolvency situation.
The supplier is unable to make it a condition of the continued supply that any outstanding charges are paid. The company must however pay for the supplies that are provided in the relevant period.
This also applies if the reason to terminate arises before the formal insolvency procedure is put in place and applies for the period in which the insolvency procedure is in place. It is possible however for the contract to be terminated with the permission of the office holder, the company or the court.
Small suppliers are excluded from the requirements set out above. To qualify as a small supplier, the supplier must satisfy at least two of the three conditions set out within the Bill.
Formalising restructuring arrangements
This is similar to the provisions that are already in place for a scheme of arrangement and is intended to avoid a formal insolvency procedure being required.
In brief, a company, its creditors/members or any appointed liquidator or administrator may make an application to the court for the court to order that a meeting of the company’s creditors takes place to consider a restructuring plan.
Every creditor whose rights are affected by the compromise or arrangement must be permitted to attend the meeting. The company’s secured creditors will also be bound by the arrangement and as such must be permitted to attend and vote at the meeting.
If 75% in value of the creditors, class of creditors, members or class of members (as the case may be) approve, then the court in all likelihood will sanction the arrangement. The court may still sanction the application even if the requisite 75% has not approved the arrangement in certain conditions.
As widely reported, the courts will ignore the period between 1 March 2020 and 30 June 2020 when assessing the amount of compensation payable by a director who is subsequently found liable for wrongful trading.
The objective is to remove the deterrent of a possible future wrongful trading application, so that directors of companies which are impacted by the COVID-19 pandemic may make decisions about the future of the company without the threat of becoming liable to personally contribute to the company’s assets if it later goes into liquidation or administration. This will in turn help to prevent businesses, which would be viable but for the impact of the pandemic, from closing.
I have previously commented on the potential risks for directors where it can be shown the company was already insolvent prior to the pandemic and I await with interest the attitude of the courts when determining “viable but for the impact of the pandemic” on future Wrongful Trading actions.
It is also important to note that the Act does not limit the application of misfeasance or breach of duty claims against directors. Accordingly, directors remain at risk of personal liability if the company later goes into an insolvency process and the directors failed to act in the best interests of creditors prior to the insolvency process when the company was in a parlous financial position or where the directors have acted negligently, recklessly or fraudulently.
Under the Bill, creditors shall not present winding-up petitions on the basis that a company is unable to pay its debts as and when they fall due, unless there are reasonable grounds for believing that COVID-19 has not impacted financially on the debtor company or, alternatively, that the debt issues would have arisen in any event.
It would be for the creditor to prove to the satisfaction of the court that the non-payment is for a reason other than connected with the current pandemic.
As with Wrongful Trading claims it will be interesting to see how the courts deal with petitions but it is likely that strong evidence of a non-COVID-19 related reason for the debt not being satisfied will be required for them to effectively go against the Bill.
This is only a temporary measure and at this time the restrictions will be lifted after 30 June (or one month after the Bill comes into force.) However in reality, the restrictions will likely still be in place until much later in the year to allow time for the economy to recover.
The restriction has retrospective effect and impacts upon:
- Statutory demands that have been served from 1 March 2020
- Winding-up petitions that have been presented on or after 27 April 2020
- Winding-up orders that have been made since 27 April 2020
When the Bill comes into force, a creditor will not be able to present a petition if that petition is based on a statutory demand that was served on or after 1 March 2020 effectively voiding that demand.
Further, the creditor will not be able to continue with any winding-up petition that has been issued at court which is based upon a demand that was served on or after 1 March 2020.
Any existing winding-up order will be void where all of the following conditions are satisfied:
- A winding-up order has been made between 27 April 2020 and the day before the Bill comes into force;
- The winding-up order was made on grounds that company was unable to pay its debts;
- The winding-up order would not have been made by the Court under the new restrictions (as it would not have been satisfied that the debtor company’s financial difficulties would have arisen despite COVID-19).
Where a petitioning creditor presents a petition and states it has the reasonable belief that COVID-19 has not impacted financially on the debtor company but the court disagrees with that reasonable belief, the court still has discretion to make a winding-up order if it is satisfied that the company’s inability to pay its debts would have arisen anyway.
The information was correct at time of publishing but may now be out of date.