Last month, in recognition of the ongoing distress many businesses are experiencing during the Covid-19 pandemic, the Corporate Insolvency and Governance Bill 2019-21 was published and had its first reading in Parliament.
The purpose of the Bill is to provide businesses with the flexibility and breathing space they need to maximise their chances of survival and comply with their legal obligations during these very challenging times.
The Bill includes a range of measures – some which have been in the pipeline for a number of years; others which have been introduced in response to the current climate and which are only intended to operate on a temporary basis.
A summary of the key measures that will come into force once the Bill has been fully implemented (which should be soon as government intends to ask Parliament to expedite the progress of the Bill) are set out below.
There is currently no free-standing moratorium available for UK companies. Under the new legislation a statutory moratorium process will be made available for insolvent companies or companies which are likely to become insolvent if it is considered likely that said moratorium would result in the company being rescued as a going concern.
In order to qualify for the moratorium, the directors will need to make a statement that the company is, or is likely to become, unable to pay its debts. The moratorium will initially last for 20 business days, which will allow viable businesses time to restructure or seek new investment free from creditor action, but can be extended without creditor consent for a further 20 business days and with creditor consent or by the court for up to a year (or more).
Arrangements and reconstructions for companies in financial difficulty
These provisions will allow struggling companies, or their creditors, to propose a new restructuring plan proposal to avoid insolvency proceedings.
This new restructuring procedure bears a strong resemblance to the existing scheme of arrangement but, under the new measures, a “cross-class cram down" feature will be introduced, which allows dissenting classes of creditors to be bound to a restructuring plan. This means that, even where a class of creditors have voted against a proposal, it can still be confirmed by the Court if it is shown that the creditors would be no worse off under the restructuring plan than they would be in the most likely outcome were the restructuring plan not to be agreed (and are thus not financially disadvantaged).
The Bill will temporarily prevent statutory demands and winding-up petitions being issued against companies which are financially affected by the Covid-19 pandemic and therefore unable to pay their debts.
During the restriction period, any creditor asking the court to make a winding-up order on those grounds must first demonstrate to the court that the company’s inability to pay its debts was not caused by the pandemic.
The measure will apply to any winding-up petition presented in the period from 27th April 2020 to 30th June 2020 or one month after the coming into force of the Bill, whichever is later, and it includes provision to rectify situations where, following the announcement of the measure but in advance of its enactment, a petition has been brought under the pre-existing law.
The Bill will temporarily suspend the wrongful trading provisions in the 1986 Insolvency Act 1986 for the period between 1st March 2020 and 30th June 2020. This means that Liquidators and Administrators will be unable bring claims for wrongful trading against an insolvent company’s directors for any losses caused by trading during this period.
It is important to note, however, that there is no suspension of directors’ duties to their creditors during this period and Liquidators and Administrators are still therefore permitted to bring claims against directors for breaches of such duties.
Termination Clauses in Supply Contracts
When a company enters a restructuring or insolvency procedure, suppliers often stop supplying it under a contractual termination clause triggered by insolvency. This can prove to be the “final nail in the coffin” for many companies that rely on those supplies to continue trading and rebuild the business.
The Bill will prohibit such termination clauses and require (subject to certain exclusions) all contracted suppliers to continue supplying, even where there are pre-insolvency arrears.
There are safeguards for suppliers, including the option for them to be relieved of the obligation to continue supplies if it causes hardship to the supplier's business, and there is also a temporary exception for small company suppliers.
Meetings and Filing Requirements
The Bill will allow companies greater flexibility as to the manner in which they conduct general meetings that take place between 26th March and 30th September 2020, including the power to hold such meetings, and allow votes to be cast, by electronic means, irrespective of whether this is permitted by the company's constitution.
It will also grant a temporary extension to the period within which a public company is required to file its annual accounts and reports with Companies House and will empower the Secretary of State to extend the deadlines for certain company filings, including the periods specified in the Companies Act 2006 for filing company accounts and annual confirmation statements, and for registering charges.
Under the current legislation, a missed deadline will automatically result in a financial penalty and can result in criminal sanctions for the company's directors or the company being struck off the Register of Companies. Extensions of time have already been offered to companies but the Bill allows the Secretary of State to temporarily make further extensions to deadlines.
For further advice or information on the measures proposed in the Bill or to discuss any other business matter please contact Martyn Tennant by email at email@example.com or by telephone on 0191 384 2441.