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  • Corporate Insolvency and Governance Bill 2020: the biggest shake up of insolvency law in 2 decades
Article:

Corporate Insolvency and Governance Bill 2020: the biggest shake up of insolvency law in 2 decades

03 July 2020

The new Corporate Insolvency and Governance Bill, which was recently passed into law on 26th June, has been described as the biggest shake up of Insolvency law over the last 2 decades.

The speed at which the bill received Royal Assent demonstrates the importance of the reforms and comes at a critical time when businesses are trying to adapt to a post Covid-19 landscape.

The virus is estimated to cost the UK economy over £400bn, equivalent to the total amount borrowed in the six years since 2014, when borrowing was still elevated after the financial crisis.

Despite the level of Government support provided via loans, grants, payment holidays and the furlough scheme, the introduction of this bill will provide a much needed lifeline for many businesses.

The below table summarises the various reforms and measures effected by the Bill, with the Temporary measures now extended to 30th September 2020.

 

Permanent Reforms

What is it

Key Components

BDO Comment

Standalone Moratorium

 

Provides companies with a statutory breathing space enabling them to pursue a rescue plan

 

 

 

Creates a temporary payment holiday from pre-moratorium debts, and protection from enforcement.

 

Lasts 20 business days and is extendable by a further 20 days by the directors. It may be extended for up to 1 year with creditor/court consent, or a longer period if ordered by the Court.

 

The company will remain under the control of its directors during the moratorium, and the process will be overseen by a monitor who must be a licenced insolvency practitioner.

 

The monitor must form the opinion that it is likely that a moratorium would result in the rescue of the company as a going concern.

 

Up to 30th September 2020 this going concern opinion can be moderated to reflect any negative financial impact relating specifically to Covid-19.

Similar to a CVA, the directors remain in control of the Company (with some restrictions in place) and the procedure offers the business with a defined period of time to agree a going concern plan.

 

Pre moratorium debts are effectively frozen, however unlike a CVA they are not compromised and remain due in full after the moratorium has completed.

 

Debts during the moratorium period remain payable as they fall due, including all rents, employment payments and finance costs, therefore the timing of a moratorium will be critical.

 

The business must have sufficient working capital during the moratorium to service ongoing liabilities, otherwise the process will fail.

 

Information will need to be provided to a monitor throughout the process to ensure that the company can be rescued and is operating in the best interests of its creditors.

 

 

 

Restructuring Plan

A process in which a compromise can be struck with creditors and/or members of a company.

 

Opportunity to compromise secured creditor claims.

 

Opportunity to “cram down” dissenting creditors (subject to conditions).

Implementation will involve a two-stage Court process by which dissenting classes of creditors and members can be bound, rather than just minorities within a class.

 

Similar to a scheme of arrangement except:

• Need to demonstrate the company is in “financial difficulties” or likely to be soon.

• Only 75% by value of a class of creditors needs to vote in favour of the plan.

• The court may sanction the plan if one or more classes have voted against it if the court finds none of the members of the dissenting class would be worse off in the alternative if the plan does not go ahead.

 

The directors remain in control of the company and there is no need for a formal appointment to be made.

 

The restructuring plan can be used in conjunction with the new moratorium, however the limited time available under a moratorium may make it difficult to effect.

 

The process is unlikely to be attractive to SME businesses in Northern Ireland due to its cost and complexity, with a CVA process much more likely to be used.

Supplier Termination Clauses

A reform which prevents suppliers of goods or services from terminating their contracts for supply by reason of the debtor company entering an insolvency procedure.

 

The new laws will prevent companies from withholding supply and effectively ransoming insolvent companies to pay their arrears or force increase payments.

Directors must be mindful that the reform does not cover any breaches post insolvency and therefore payments for new supplies must be made.

 

The rule cannot be abused as the court can agree to terminate the contract if it is satisfied that continuation of the contract would cause the supplier hardship.

 

Commercially it may be difficult for insolvent businesses to enforce noting the time to pursue through court and the likely cost.

 

 

 

Temporary Measures

What is it

Key Components

BDO Comment

Suspension of Wrongful Trading Liability

A temporary suspension to the wrongful trading provisions which will apply retrospectively from 1 March 2020 thru to 30 September 2020. 

 

Removes the threat of personal liability for Directors during the pandemic. 

 

Directors must make their best efforts to continue to trade and fulfil their duties during the period associated with the Covid-19 pandemic

Due consideration should still be paid to every decision that is made by a Company Director in this period and fully documented.

 

Given that no indication has been provided in terms of a potential suspension of claims against Directors for other offences under Insolvency Law (for example, Transactions at Undervalue or Preference Payments), Directors should continue to seek professional advice if they are concerned about the underlying viability of their business and their associated personal obligations.

Suspension of Statutory Demands and Winding-up Petitions

The temporary prohibition of petitions on the basis of statutory demands and the temporary restriction on winding-up petitions and orders being made as a result of Covid-19 financial difficulties.

 

It provides for a ban on the use of statutory demands made between 1 March and 30 September 2020 and winding up petitions presented between 27 April and 30 September 2020 against companies unable to pay amounts owed due to Covid-19.

The presentation of a winding up petition itself is not banned, but the petition will need to be reviewed by the court, and if the court is satisfied that the inability of the business to pay relates to Covid-19, the petition will be voided. 

These temporary measures are intended to prevent aggressive creditor action against otherwise viable companies struggling because of Covid-19.

 

However, if you are a creditor trying to pursue a debt, there is limited action that can be taken until September 2020.

Extended statutory filing periods and flexibility regarding meeting requirements

Temporary relaxing of filing and meeting requirements to provide flexibility to company’s during the restrictions imposed due to Covid-19.

Companies House is granting to those who apply, a three-month extension to file company accounts (up to 12-month extension for PLC’s) which are due between 26th March and 29 September 2020. 

Temporary extensions are also being granted for filing of confirmation statements and registration of charges.

 

Flexibility is being provided to companies to hold Annual General Meetings, either by postponing the AGM or holding it online or by telephone using only proxy voting.

If your accounts are going to be late because your company is affected by Covid-19,you must take action before the filing deadline and apply for an extension here.

 

You should also file your accounts online if you are able to.

 

The introduction of the Bill is seen as a debtor friendly tool kit and will undoubtedly help companies to survive the next 3 months, however it won’t come easy and there are still a lot of difficult decisions for directors and business owners to consider in the short term.

Insolvency practitioners will have an important role to play as the new measures take effect and it is critical, more so than ever, that businesses seek the right advice in a timely manner.

Contact the team today.