Corporate Insolvency and Governance Bill

Published 22 May 2020 by Moon Beever

At last the bill was laid before parliament yesterday 20th May, seeking to confirm legislation for many of the recent pronouncements on corporate reform. 

The bill is a mixture of (i) very long promised reforms held up by a lack of legislative time-owing to Brexit, and -until the pandemic- scheduled to receive parliamentary time in 2022, such as a new restructuring process and a new moratorium; and (ii) directly COVID-19 related reliefs and prohibitions. As it has been pushed through so quickly in reaction to the crisis, the government also gives itself liberty to amend or extend the provisions by statutory instrument to react to an ever changing picture. That power is initially to expire in April 2021 though can itself be extended. 

As heralded the biggest headline is the creation of a new moratorium for businesses offering a free-standing moratorium for eligible companies for an initial 20 business days.

The company and its proposed Monitor must also make a number of statements, regarding the company’s financial state and prospects for rescue, before it can enter a moratorium. 

It can be extended after the 15th day if the appointed “Monitor” confirms that debts incurred during moratorium, and pre-moratorium non-holidayed debts have been paid (wages, rent and redundancy cannot be subject to the payment holiday) either with consent of creditors or by application to court or without creditor consent.   

The Monitor must be a licensed insolvency practitioner. This is a (potential) win for the profession as originally the position was not thereby restricted. There is nothing in the legislation (as had previously been mooted) preventing the Monitor from subsequently taking an insolvency appointment. 

It remains to be seen how useful this will be in practice. The Schedule A1 moratorium was barely used because of the limited range of eligible companies as well as the requirement on the IP to certify in advance that the company had enough cash flow to pay its continued trading debts and to monitor that position continuously. The new moratorium seems to require less defined advance warranties on the Monitor which should assist but it remains to be seen how easy or desirable a role this will be.  That will spend on the type of business. A workforce heavy business may not be helped, where a less people heavy one could be. 

It is a debtor in possession breathing space of which creditors must be notified. There are restrictions on raising credit of more than £500 without notifying of the moratorium. 

There is no particular route expected  out of the moratorium- it can allow a breathing space for preparation of a company voluntary arrangement, advice on administration or liquidation, or a scheme of arrangement or a restructuring plan under the new part 26A Companies Act 2006, or simply to source new capital.

There are limitations including that the company can’t have been under a moratorium in the last 12 months (unless the court allows it.)  The moratorium must be brought to an end if it becomes apparent to the Monitor that the company is unlikely to be rescued or can’t pay the debts set out above. The requirements on prospect for rescue, bringing the moratorium to an end, and certain of the exclusions for entry are temporarily amended to account for the COVID-19 pandemic. Even a company subject to a winding up petition may seek a moratorium but in that instance must apply to the court and the court must consider that will a better return to the body of creditors will be achieved with a moratorium than without. The Monitor’s opinion will be key and have to be quickly formed. 

Other non-COVID provisions include -a permanent change to s 233 IA86 – A new section 233B is introduced preventing termination of a contract simply by reason of insolvency, a reform which has been pressed for for a long time by R3 and other stakeholders. Suppliers can apply to court to terminate on grounds of hardship.

Here there is a COVID provision included as, temporarily, small suppliers are excluded until 30 June or a month after commencement of the Act whichever is later, but after that all sizes of businesses are bound.   N Ireland is caught up with England with expansion of essential suppliers to IT related services etc. 

The Bill introduces a new Restructuring process as mooted following “A Review of the Corporate Insolvency Framework” and on and off for many years before. It adds a new part 26A Companies Act 2006-introducing a Restructuring Plan which will allow cross-class  cram-down to force dissenting creditors to agree the plan if the court approves it and they would be no worse off that in another form of insolvency procedure. It is intended to support the introduction of rescue finance.  Query the need for this as availability of finance generally is a very different landscape to the post financial crisis view. 

Schedule 10 deals with statutory demands and winding up. Part 1 prevents presentation of a petition based on a statutory demand served between 1 March and 30 June 2020 –In the ordinary course of events a statutory demand isn’t required anyway if the creditor is sure of his debt and has demanded it, but Part 2 prevents presentation of petitions under section 124 unless the petitioner can certify they have  “have reasonable ground for believing that coronavirus has not had a financial effect on the company” and must specify the facts “by reference to which the relevant ground applies would have arisen even if coronavirus had not had a financial effect on the company”.  This may be evidentially very difficult. Many petitioners will not be in any position to know much more than that they haven’t been paid.  Of course winding up is at the discretion of the court in any event. This is said to be a reaction to landlords using petitions for debt collection, but is applicable in the Bill to any creditor demand/petition in the period. 

Any winding up orders made after 27th April but before the Act comes into force are treated as void unless they would have met the criteria the new Act will now require. Directions will need to be given restoring the company’s position, or dealing with evidence as to what effects coronavirus did or didn’t have if the petitioner wants to hang on to the order. The Official Receiver or Liquidator is statutorily protected from civil or criminal liability. It is silent as to what happens about incurred costs given the effect is retrospective and costs will have been incurred since 27 April. Unwinding may be a headache in many cases with employees, contracts, and so on.   

Whilst the earlier announcements said there would be a suspension of the offence of wrongful trading from 1 March to 30 June, in fact the Bill merely imposes a statutory presumption against it. In practice this has been a provision of limited recovery value with developments in case law.  It does not, of course, absolve directors of their general duties. It is hard to see why any liquidator would pursue a stand-alone wrongful trading claim for a short period during the pandemic crisis. There would have to be significant other causes of action.

The Bill also introduces the Relaxation of certain meetings requirements until September and empowering the Secretary of State to extend accounting etc. deadlines. Virtual meetings envisaged.

There is clearly a lot of scope for litigation and court involvement and factual as well as legal disputes throughout the Bill which will add to cost. We will be reliant on the skills of the Courts in making this all work sensibly. In that we are lucky in our Judiciary. 

It remains to be seen when the expected tsunami of insolvencies and redundancies will appear- post government financial support coming to an end -at present by October. If there is insufficient funding/availability of insolvency professionals, the Companies Court and the Insolvency Service may find itself flooded with cases for administrative burial. At least we have that option here, in other countries, such as Ireland there is not the state function to take on the burden.