Corporate Insolvency and Governance Bill 2020

With the coronavirus crisis having such a huge impact on companies throughout the Country, The Government has now introduced the Corporate Insolvency and Governance Bill to Parliament.

“The permanent changes are very welcome additions to the armoury of struggling companies.”

This Bill seeks to assist companies and maximise their chances of survival, protect jobs and support the Country’s economic recovery. It consists of insolvency measures which will support businesses in the short term and, where needed, provide new options for company rescue, and corporate governance measures, which will give directors more flexibility during the current emergency to focus on the things that matter most while they have reduced resources and restrictions.

What is changing?

The Bill, which is expected to fast-tracked through Parliament, with the aim of it receiving royal assent before the end of June, introduces the following permanent and temporary amendments to the current regime, detailed further below:

Permanent changes:

a new moratorium on enforcement action; giving struggling businesses the formal breathing space to pursue a rescue plan. It creates a moratorium during which no legal action can be taken against a company without leave of the court. It is vital to introduce the moratorium now to ensure that companies which are struggling as a direct result of the pandemic are given the opportunity to survive. The moratorium is monitored by an Insolvency Practitioner who must monitor the company’s affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern.

a new ‘restructuring plan’ process; This will support viable companies struggling with debt obligations to restructure under a new procedure. It allows courts to sanction a plan that binds creditors to a restructuring plan if it is fair and equitable and in the interests of creditors. Creditors vote on the plan, but the court can impose it on dissenting creditors (‘cram down’).

disapplication of supplier termination of contract provisions for insolvency; When a company enters an insolvency or restructuring procedure, suppliers will often either stop or threaten to stop supplying the company. The supply contract often gives them the right to do this, but it can jeopardise attempts to rescue the business. The Bill will mean suppliers will not be able to be jeopardise a rescue in this way.

Temporary changes:

a temporary suspension of wrongful trading; The Bill will temporarily remove the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the crisis with the uncertainty that the company may not be able to avoid insolvency in the future. Liquidators and administrators will not be able to take an action against an insolvent company’s directors for any losses to creditors resulting from continued trading while the wrongful trading rules are suspended. This will remove the pressure on directors to close otherwise viable businesses to avoid potential liability. 

changes to the Winding up Petition and Statutory Demand processes; The Bill helps struggling businesses by temporarily removing the threat of winding-up proceedings where unpaid debt is due to Covid-19. It introduces temporary provisions to void statutory demands issued against companies during the emergency. This gives businesses the opportunity to reach realistic and fair agreements with all creditors.

changes to allow an AGM or GM to be held, other than by physical meeting, even if their constitution would not normally allow it; AGMs (and General Meetings) are central to good corporate governance, but having hundreds of individuals in a room is not permitted under the statutory restrictions on public gatherings, so many companies cannot hold their AGMs in accordance with their constitutions. The Bill temporarily allows those companies and other bodies that are under a legal duty to hold an AGM or GM to hold a meeting by other means even if their constitution would not normally allow it. As a result, directors will not be exposed to liability for measures that need shareholder endorsement, and shareholders rights are preserved.

potential extension of filing deadlines with Companies House;  Companies are required to make a number of different filings by fixed deadlines at Companies House each year. Missing the deadline automatically results in a financial penalty. Companies House has already done all it can under existing law to offer extensions to those deadlines. Over 70,000 companies have taken advantage of this flexibility already, but they may need more. The Bill allows the Secretary of State temporarily to make further extensions, enabling struggling businesses to focus on the things that matter most while they have reduced resources and restrictions.

The permanent changes are very welcome additions to the armoury of struggling companies, particularly as we face the prospect of a once in a generation recession. Used properly, they have the potential to save significant numbers of businesses and jobs that would otherwise be lost to preventable insolvencies.

The temporary changes have not been as universally welcomed. This is perhaps understandable, on the basis that they seek to protect debtors during the height of this crisis, which is naturally at the expense of those who are owed money. As discussed above, the suspension of wrongful trading is designed to prevent directors putting companies into an insolvency process in haste, but (rightly) does not water down directors’ duties generally. The changes to demands and petitions are a blunt instrument, that will frustrate unpaid creditors (who may have cash flow issues of their own), but may offer welcome relief for those in distress as the pandemic has caused cash flow to dry up.

The hope is that these short term measures will provide a bridge for vulnerable companies to survive until conditions improve and/or they can take advantage of the alternative options that the new regimes provide, in the interests of themselves, their employees and their creditors.

What remains imperative during these strange times is that any director whose company is or is at risk of facing insolvency in the coming weeks and months, seeks the advice or input of an experienced insolvency professional without delay.

If you would like to learn more about these changes or feel that we could help your business in these challenging times, please contact the author of this article.